Small Business Credit Procedures | Extraordinary Business

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Business credit application

Just about every small business that extends credit to its customers has to create and implement internal credit procedures. The extent to which a small business has to deal with credit and collection issues depends on the nature of the business, the margins of the business and the how customers pay for goods or services.

If a small business collects money up front before performing services or providing goods, they will not have any credit or collection issues. However, if a business accepts credit cards or provides terms to its customers in any fashion, it will have to tackle credit and collection issues at some point. If no credit is extended, there are no collection issues, but credit is often necessary for small businesses to complete with larger companies. It is a common occurrence that larger businesses will require smaller companies to provide terms that may extend to thirty, sixty or even ninety days. Dealing effectively with credit and collection issues can make or break a small business from a cash flow perspective.

This article will deal with creating effective credit procedures as any good collection policy actually starts well before the matter turns into a collection issue. Effective collection procedures actually begin before any goods are delivered or services are rendered. They start with a credit decision. Before any goods are delivered or services are provided to customers, a small business needs to have a policy on credit. The first aspect of creating a credit policy is to have a credit application that is filled out and signed by customers. A signed credit application should obligate customers to pay invoices on time and to pay for collection costs and penalties in the event invoices are not paid timely or in the event the matter needs to be sent to a third party collection agency like The Collection Law Group. In addition, the credit application should provide for personal liability on the part of the owner of the customer in the event they do not pay for invoices in a timely fashion. Getting a personal guarantee from an owner is only realistic if the business is a small to medium size entity.

As part of the credit policy, a small business needs to decide how rigid or flexible their policies should be. This really depends on the risk propensity of the owners and the margins of the small business. The larger the margins the more credit risk most businesses can take. A question to ask with respect to this issue is “are all bad debt bad?” The answer to that question requires an opportunity cost analysis.

After a credit application is established and credit policies are in place, a person or department needs to be established that actually makes credit decisions. This person or department needs to do the following:

  • Make sure the credit application is complete.
  • Request a credit report from a reputable credit reporting agency.
  • Analyze the application and the credit report and decide how much, if any, credit can be extended to the customer. If the customer is not credit worthy at all, they need to be notified immediately that the only way for them to receive the goods or services is to pay in advance.

Making good credit decisions if the key first step to creating effective internal collection procedures because if smart choices are made, a small business will have few, if any, collection issues. After credit is extended to a customer and goods or services are delivered, invoice payment issues then move to the accounts receivable department of the small business.

Brad Magill is a lawyer and CPA with over 20 years of business and accounts receivable experience. He is the president of the commercial collection agency, The Collection Law Group, Inc. TCLG is a group of lawyers who collect past due business accounts and receivables from companies.

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