Unless you are a retailer of fast moving consumer goods, you probably take payment from your customers in 30 to 90 days from statement. It has become so entrenched in business today that we need to remind ourselves what this really means for your business.

Selling on credit or extending payment terms to your clients is effectively granting them a loan and it means that you have just become your client’s favourite neighbourhood banker. And you thought you were selling them stuff!

When we get our head around the fact that we are granting a loan to our client we need to ask the same questions of them as when your little sister is asking for lunch money. “How much do you need and when are you going to pay it back?” And even when they have answered those questions, you need to probe even further and determine if they can afford it.

How do we do this then daily?

The answer is simple: by having a robust credit policy.

But implementing it can be daunting. Your company’s credit policy should be well thought out and effectively managed. You are a bank now and should approach extending credit like a bank.

The following components are a must:

  1. Credit application

You might be eager to sell to your customer but remember, they are asking for a loan, so don’t skip this important document. The credit application should gather the important information like the amount required as well as the payment terms.

Use the application to stipulate your terms that you will allow and by having your client signing it you have a legally enforceable document if things go sour.

  1. Financial statements

The only way you can determine if your client can afford to pay back the “loan” is to see how financially healthy they are. This is very important if the client is not a public company. Don’t be afraid to ask for financials. And if they don’t want to supply them, ask for client referrals and contact them to establish how diligent they pay their creditors.

Use credit agencies to determine if there are any adverse information like judgements obtained in the courts or if they are listed as a slow/bad payer.

  1. Calculate the credit limit

No loan or credit limit is unlimited. The same applies to your client’s credit limit. You need to be comfortable with the amount of exposure you are willing to risk on a single client. Whether you determine this limit on the strength of your balance sheet or theirs, you must have one. Ask your accountant to help with this as it can become quite technical.

Credit agencies can also obtain bank codes on your client which will give you a good indication of the size of the credit limit to be considered. You may even consider taking out credit insurance on your client and the credit insurer will determine the risk of the client not paying its creditors and will provide a suitable limit.

How the limit is determined may vary from client to client but what is important is that it must be adhered to rigidly.

  1. Manage the debtors book

Your debtors book is a snap shot of the size of the loans your business has extended in the last 30 – 90 days. There are several ways to reduce or limit the size of the book.

Selling some of the debt to Flex Capital is an effective way to reduce the debt and inject cash into your business. Enforcing you credit limits on your clients by holding stock back into the next month until payment is made is another option. It may sound counterproductive to limit your client’s sales in a month but could just rescue your own business from drowning in debt extended to clients that end up not paying.

Selling on credit is part and parcel of being in business and can sometimes be the only way to be in business. Therefore, it needs to be managed like any other process. The success of what you do is determined by how well you do it, day after day.