In this age of global competitiveness, small business owners are often faced with a dilemma of selling on credit to various buyers. While selling on credit may offer its share of business development opportunities, it can very easily turn into a vicious cycle of default and delinquency. Since most small time business owners including small and medium enterprises (SME’s) work on a limited financial budget, any default on payments by the buyers can have catastrophic results for the financial health of the business and rolling of capital. It’s true that avoiding bad debt and credit defaults cannot always be foreseen but there it’s imperative for all small and medium enterprise business owners to have a dedicated credit policy that must be drafted keeping in view their clienteles and business services offered.
Formulate a Credit Policy: Formulating a credit policy is a very helpful tool in bypassing account delinquency and payment defaults. Formulation of a credit policy not only brings a sense of professionalism to the SME by making sure that all checks and balances are taken care of before giving credit period to buyers, it also cuts out case centric approach usually undertaken by most companies. The formulation policy should be cover a detailed set benchmarks taking into account credit issuing guidelines to credit limit facilitations and penalties and interest rate in case of default payments. The credit policy must be signed by all clients irrespective of volume of order or financial transaction to limit any possible losses to the enterprise.
Credit Check Client History: No matter how big or small the client is, checking on the client’s previous credit history and transparency in its financial dealing must be the first step before offering any credit allowances. While checking on credit ratings of a private SME entity may not always be possible, checking on the client’s previous payment cycles and credit history must be checked thoroughly to avoid any delinquency. If the credit history remains unsatisfactory, it is advised to either seek advanced payments or payment by non defaulting financial tools like credit cards to get immunity from any possible bad credit loss cycles.
Promote Advance Deposits: All business service, manufacturing and product bases business enterprises are better off formulating their credit policy in such a way that some amount is initially accepted as deposits or advance to the services or products being rendered. Usually a 50% payment in advance is the norm for SME’s and other service providers while the balance amount is to be paid after delivery or as finalized in the credit policy agreement.
Make Sure Transactions are inked in Black and White: No matter what side of the spectrum one stands, making all transaction black and white is a win-win situation for the enterprise as well as the buyer concerned. If the SME has a fixed credit policy, minor alterations in terms and conditions can be considered on an individual basis with the spirit of the policy upheld and every point demarked and notified in advance. The payment agreement mutually accepted by both parties need not be a long detailed comment but can be a legal substitute in case of any dispute on the mutually accepted terms and conditions as mentioned in the credit policy documentation.
Formulating credit policy documentations and inking of all financial transactions may not go down well with a number of first time clients but its better safe than sorry as more transparency brings in mutual respect and professionalism from both sides. Sometimes small steps can bring in benefits that may well have been lost in the black hole of financial defaults and delinquencies.