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The Truth About Small-Business Credit
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Article 7: Should You Extend Credit To Customers?
Most businesses want to increase sales quickly. One way is to offer credit in the form of extended terms.
“Customers are likely to buy more if credit is extended than if they are forced to pay cash,” says Mark Tuniewicz, chairman of the board of the National Association of Credit Management (NACM), an organization of business credit and financial management professionals.
And giving credit can help you stand out against your competitors: “All else being equal, customers will favor the business that offers terms,” says Tuniewicz.
Extending credit, of course, is fraught with danger. Your risk of not getting paid increases with the length of time you extend terms.
To protect yourself, you’ll want to know as much as possible about your customer before granting credit.
The first step is to have your customer complete a credit application which provides you with the individual’s identification and bank and trade references. Your customer should sign the form, granting you permission to contact references and order credit reports. Then you may want to order reports from one or all of the big three credit bureaus.
These companies sell credit reports about businesses:
These companies sell credit reports about consumers:
Credit reports will tell you if your customer pays bills on time, has been involved in lawsuits or has filed for bankruptcy in the last 10 years.
These reports do cost money. Experian, for example, charges $24.95 for a single report on a business.
In many cases a customer’s potential business doesn’t justify the cost. But, you can take other steps to limit your risk.
You might decide that you will not extend credit to any company that has ever filed for bankruptcy, or to anyone with a credit score below a certain level. You may require that officers of a corporation sign personal guarantees for credit granted over certain prescribed limits. Or you may even require personal or business financial statements that demonstrate a certain level of liquidity.
The decision to extend credit to your customers can be a complex one. Bear in mind that no matter how refined your methods, you cannot reduce your risk to zero.
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