Most commercial sales to reputable companies are done using trade credit, usually on net 30 to net 60 day terms. In many cases, the client demands credit as a condition of doing business. Obviously, offering trade credit to the right clients can be a great way to grow your business. On the other hand, offering trade credit to the wrong clients can spell financial disaster.
This article covers the two main challenges that most small business owners face when offering trade credit:
- determining which clients are worthy of receiving payment terms
- having the financial resources to wait up to 30 days (or even longer) for payment
One small disclaimer. It’s impossible to eliminate all credit problems, but doing a proper credit assessment – using the following three steps – helps minimize them:
Step 1 – Get a credit application
Get a credit application from your potential customer. Ask your customer to list their company name, address, and trade references. Then call these clients and politely inquire about your potential customer. Now, doing a reference check may run counter to our culture of trust, but smart companies perform this due diligence. Just remember: be polite and professional.
Step 2 – Use commercial credit reports
Getting a commercial credit report nowadays is relatively easy – you can buy them on the Internet. Two well-known providers are Dun and Bradstreet and Equifax. Commercial credit reports usually show the payment profile of your prospective client and often recommend a credit limit. It’s a good idea to check the information in these reports against what the trade references are saying.
Step 3 – Make a decision
Once you have all the data, you need to make a decision. Many times, it’s an easy and clear-cut answer. Often, you simply have to make a judgement call. Ask yourself, “Given what I know, do I trust this client to pay me in full after 30 (or 60) days?” Your answer will determine the credit line.
Can’t afford to wait up to 30 days to get paid?
One last point: even if your client has great credit, many companies can’t afford to offer payment terms because they don’t have the resources to wait that long for payment. In these cases, invoice factoring can solve the problem. Invoice factoring finances your open invoices from creditworthy customers. In effect, factoring invoices accelerates your revenues from clients who pay on credit terms. One additional benefit of working with invoice factoring companies is that they can handle the credit review function for you – helping you determine which clients are creditworthy. You can leverage their expertise in order to make informed credit decisions. Consequently, financing your invoices can be an ideal solution for companies that have cash flow problems because they are offering terms.
Need more information? Learn how invoice factoring works.
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Disclaimer: This article is provided for information purposes only and is not intended as legal/financial advice. Please consult a professional if you need advice.