

Granting Credit to a Customer
The small business operator must realize that granting credit will be, and should be, one of their major concerns. Poor credit and collection policies have resulted in the failure of many companies, so it is very important to establish credit policies at startup. These policies will have an influence on the financial, marketing, and sales/service planning, and will help to determine whether to deal in cash, credit or a combination of both.
There is no set credit procedure which will fit every business. The choice will depend upon a host of situations: the particular industry you are in; the customer and the likelihood that you will be paid in a timely manner; your competition; national and local economical conditions; your own financial status; and finally, the affordable risks you can and are willing to take.
When planning the opening of your business you should put into place written general credit-granting guidelines which can be applied to best fit the customer and your own circumstances, with variances which can be used as necessary to fit case -by-case situations. Will you accept checks or credit cards? Will you accept cash only and/or credit, c.o.d? Will you expect written contracts, collateral, promissory notes? What payment terms will apply to your billings? What procedures will you use to collect delinquent accounts?
When granting credit to a customer, the owner is actually financing that purchase, be it services or products. There are two elements of the transaction that should be considered:
What is the impact on the cash flow or financial needs of the company?
Local banks are interested in building their credit card business. Talk with your banker about setting up a credit card relationship. The cost to set up a program currently is about $100, which includes the necessary supplies. Be aware that the major cost is the charge for each transaction, which, depending upon the volume may run as high as 6% of the sale. However, this expense should be weighed favorably against the potential for additional sales and the fact that the credit card supplier advances you cash almost immediately and assumes much of the credit risk. This can have a very beneficial effect on your operating expenses and cash flow. There is no need to allow for losses on bad debts, nor for you to worry about the time spent working on collections, hence more time is available for focusing on the main purpose of your business. In your credit planning, do not overlook the importance of pricing services and/or products to cover the credit card charge.
Chargebacks
Be aware that you may receive a charge back for a credit card transaction. A cardholder may dispute a charge for many reasons (see below). The cardholder is within his/her legal rights to begin procedures to dispute the charge up to six months after the date of sale, although in some cases the charge may be disputed up to 3 years after.
Am I Liable for Chargebacks?
Yes, if the customer has a valid dispute with the charge in question and you do not satisfactorily remedy the situation. If, however, the customer doesn’t have a valid dispute and you complied with processing regulations, you may not be liable.
What are some of the Different Types of Chargebacks?
A sale can be charged back for more that 35 valid reasons, the four most common are:
no signature on a draft
failure to fulfill a request for a sales draft
no imprint on a draft
unauthorized purchase
There are numerous guidance books on credit and collection techniques available in the Government & Business Department, main Public Library of Cincinnati and Hamilton County, 800 Vine St., downtown Cincinnati. Another very good source is the Dayton Metro Library, 215 East Third St. Dayton, Ohio 45402
See Brief 4.33 for a sample credit application
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