Setting Credit Guidelines For A Small Business

Hi,
A small business owner needs to take the time to set up both credit and collection guidelines, so that the owner has a standard policy for customers in place before the customers ask the business owner if credit could be extended to them. In the business climate of today, a credit policy is an essential component of running a successful business. When setting up credit guidelines, consider the following:
1) Is it really necessary to extend credit at all? An all cash business eliminates numerous costly and time consuming tasks.
2) If extending business to business credit, consider the type of business to which credit is being extended. Net 30 days is a good starting point, but could be changed if necessary depending upon the needs of particular business customers.
3) Set a maximum limit a particular account may charge. It is important that both parties are aware of the limit when the account is opened, in order to make future communication clear.
4) When setting up an account, get all pertinent credit information from the customer. Obtain both business and personal information on the credit application.
5) Run credit reports on both the business and business owner. Call the Better Business Bureau for a report on the business.
6)Get a list of all employees, if any, who have authority to charge on the account.
7) Add a statement to the credit application that stipulates any and all collection costs, including attorneys fees, will be the responsibility of the customer in the event of default by the customer on the account.
8) Post a clear return policy if applicable.
9) Do not be afraid to deny credit to an applicant.
Utilizing a set of credit guidelines will save a business time and money down the road. On Monday I will talk about collection guidelines.
Have a good weekend!
Alan
olympicdebtspecialists.com

The Evolution of the Credit Department: Part 3

Hi,
In the last two blogs I have discussed how many credit departments have adopted a generic approach in how they decide to extend credit. I have also discussed the pressure sales people exert on credit departments to approve their credit requests. Now I want to examine some of the other pitfalls in eliminating the hands-on approach in extending credit:
1) Validating information on a credit application is more accurately done by people than machines.
2) Human involvement can identify when past credit problems should not interfere with current credit decisions. A common example of this situation is when a couple is divorced and the responsibility for financial obligations was put on the back burner during the divorce process, but both people became good credit risks after the divorce.
3) Another common occurrence is that when credit applications are rejected due to erroneous credit information on the individual's credit report. Human reviews can catch and rectify that situation more efficiently than machines.
4) Human involvement allows loan structures to be modified to suit individual credit needs that machines are not programmed to recognize. The best example of this is farming operations and their unusual income streams.
Credit departments have transformed from experienced credit professionals familiar with their particular credit fields, to computerized departments staffed by customer service reps. This change has resulted in an increase in sales and overall profits for companies. But the change also brought an increase in the cost of collections due to inferior credit. This cost has been passed on to the consumer in higher interest rates, finance charges and late fees. Tomorrow I will begin to talk about collection departments, and the people responsible for cleaning up some of the problems created by the generic approach to credit extension.
Until then,
Alan

The Evolution of the Credit Department

Hi,
Credit departments have changed dramatically over the last thirty five years. In the past, credit department employees checked and assessed all aspects of credit requests and dealt with each request on an individual basis. The result of this hands on approach was that credit was only extended to people who could genuinely afford it. As a result, the number of delinquencies, charge-offs and repossessions was very low. Due to the human verification process, it was rare that information on credit applications was falsified. Computer technology redefined how credit departments work and how credit is granted. By using computers to compile statistical data, creditors have established various formulas with which to generically grant credit. These actions have caused a multitude of problems in the credit field. It has allowed unscrupulous borrowers to obtain credit that they can ill afford and in some cases, have no intention to repay. One of the other negative effects of this generic approach to credit is that many times people unknowingly obtain more credit than they can afford to repay, and which in some instances results in financial chaos. To cover the cost of these indiscretions, the credit industry has used higher interests, finance charges, late fees, etc., Tomorrow I will talk about various structures of credit departments.
Until then,
Alan