Getting paid for our efforts is why most of us go into business for ourselves.  However, making sure that our clients pay us promptly is also the one thing that many business owners dislike doing most.  In some cases, business owners may put off the task of chasing after their clients for payment until their own businesses are affected by growing debts.  Therefore it is important that you plan ahead and spend time to develop a credit and collection system for your business.  The following are some key considerations.

Decision to Offer Credit to Clients

Some of the things that you should consider when deciding whether to extend credit to your clients include:

    Industry Norms - Is it a common practice in your industry?

    Economic Environments - Are your clients creditworthy?

    Size of Transaction - Is the size of the transaction large?

    Your Business’ Financial Strength - Can you afford to extend credit?

    Repeat Customers - Do your clients buy regularly from you? 

If the answers to the questions above are mostly positive, credit extension may make sense.  However, you should extend credit only if business conditions demand it.  You have to look at the overall costs and benefits of extending credit.  If the potential benefits (e.g. increased sales) outweigh the potential cost (e.g. risk of non-payment) then extending credit might be a good move, and vice versa. 

Types of Credit

The following are types of credit that you can make available to clients:

    Credit cards - Least risky option as most of the risk is with the card company.

    Checks - More risky as you are bearing the risk that the check will bounce.

    Credit terms - Riskiest option as you rely completely on clients’ creditworthiness.

To decide which type of credit to offer, you should consider the industry practices as well as your business’ financial strength. 

Collection Process

Effective debt collection involves two key steps - tracking overdue accounts and the actual debt collection process.

The key to tracking overdue accounts is to develop an efficient system that notifies you when accounts are due and that shows you who pays and who does not.  If your credit terms are fixed and straight forward, you may use a simple spreadsheet to track the clients’ names, account due dates, amount due, and other pertinent information.   If you have different terms for different clients, the task will be more complicated and you may want to consider using specialised software that simplifies the task.

You should also set up a system to determine which overdue accounts to handle yourself and which ones to turn over to a specialist e.g. a collection agency or a lawyer.  The deciding factors are cost and effectiveness.  However, if you collect your own debts, make sure you are familiar with the regulations that govern debt-collecting practices. 

Bad Debts

Eventually, some of the debts will become uncollectible.  If, for example, your debtor skips town or declares himself bankrupt, then you are out of luck.  However, if you take the effort and put in place a system as described above, you will be able to better manage the risks of bad debts.