If your business extends credit (or even considers it) you know how important it is to maintain a well-organized credit process. And if you don’t know it, you probably have trouble getting customers to pay you on time. If you are going to extend credit to customers (which, there are reasons many companies have to or choose to), you must create a concrete credit process from beginning to end.

Here are the steps you should take to ensure you are structuring your credit process for success:

1. Get organized - If you want to have an effective credit process, you’ve got to be ready to make it a priority. Getting paid on time is no easy feat, but if you work on developing a system, you will automatically increase your collectability rate. Therefore, start today by taking the time to sit down and sketch out a process from beginning to end. How do you “approve a customer” to do business? How do you introduce them to your terms once approved? These are the places you start, before you even invoice a customer.

2. Put it in writing - The easiest way to let customers know you’re serious about your credit policy is to put it in writing and make it visible to all current customers and potential customers. Be vocal about who you extend credit to, what your net terms are, how you accept payments, if you have late fees or early payment rewards and whether or not you report late payments to the bureaus. Setting these things in stone helps resolve any “he-said, she-saids” with clients and motivates on-time payment.

3. Have a credit application - If your customer wants credit, they are going to have to apply for it. The reason you need a credit application is because:

  • It allows you to gather the information to “vet” a customer.
  • It will give you the information to contact a customer about payment.
  • It will allow the customer to see how seriously you take your credit process, as well as sign to their commitment of paying you on time.

4. Ask for the right information - It’s not just about having a credit application, but about having a credit application that gives you the information you can use. So, be sure to include the following fields on your application:

  • Contact Information - What is the information you would need to contact a customer about a payment? Be sure to ask for everything (name, address, email, phone number, etc.)
  • EIN/SSN - You should be pulling credit reports on your customers. To do so, you will need a business’ EIN (Employer Identification Number). If a business is new, you might have to check out the owner’s personal credit score, in which case you will need their Social Security Number. Be sure to ask for both, depending on the customer.
  • References - The best way to know how a customer will pay is to ask someone who knows. Ask your customer for trade (other businesses who have extended them terms), bank and even landlord/mortgage holder references. If they don’t pay these people, chances are they won’t be paying you.
  • Payment Terms - State, yet again, in your application what your payment terms are (30 days? 60 days? etc.) Have them sign to these terms.
  • Personal Guarantee - In short, a personal guarantee allows the customer to sign to the fact that they will become personally responsible for outstanding amounts if their business defaults. This allows the application to be a tool in case of the worst possible scenario.

5. Put it to good use - It’s great that you collect this information, but it’s useless if you don’t use it to investigate. Use the EIN or SSN to pull a customer’s credit report. The top business credit bureaus are Dun & Bradstreet, Experian and Equifax. Take some time to call the business’ trade references. Always check on the landlord/mortgage holder references as these references tend to be less biased than those carefully chosen trade references. Bank references take a bit more paperwork and should only be looked at if the credit score and other references didn’t verify the client.

If you want to ensure you get paid, it’s about first verifying that your customers are in a position to handle this credit. Always vet your customers. Do the work upfront so you spend less time down the road chasing payments.

About the Author(s)

Meredith Wood

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer.

Editor-in-Chief, Fundera

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