As a small business, once you decide to extend credit to a customer, you now have a financial stake in continuing that relationship even if you suspect there might be trouble brewing. While you don’t want to crack down on a good customer too hard, too soon, you also don’t want to be taken advantage of by a customer who has become unable or unwilling to pay. Here are some ideas to help you manage this risk.
Develop a rating system. Score each customer with a number. The number represents to whom you will sell on credit and how much risk you are willing to take. Also have scores that represent customers you will not bill and those who you will no longer take orders from because of credit risk. Develop a system to objectively assign the score. Payment history and external credit scoring reports are both good indicators of whether a particular customer will be an acceptable credit risk.
Consider credit applications. Create a simple credit application. The application should be signed by the responsible party to pay the bill. If large credit amounts are expected, get a person to take personal responsibility to pay the bill. This will provide an additional means to collect your money should the company fail to pay. You will need this signed document if you wish to use a collection agency to collect delinquent accounts.
Look at history. Those to whom you provide a credit line must have their payment history monitored. If they are habitually late payers, reduce their credit line. If they frequently miss payments, move them to prepay only.
Create a notes section on your customer records. Use this to record what a late paying customer tells you. Over time, this will reveal the customers who are honest and the customers who fail that test. This idea also provides continuity of communication for the customer that tries to tell different employees different stories.
Develop a collection system. The best credit rating system starts with a receivable aging report run once a month. This will quickly show you current trouble customers and potential trouble customers. When a bill ages through the report, know what you are going to do to collect bills at 30 days, 60 days, 90 days and anything older than that.
Look for other signs of trouble. Train your team to be on alert for:
- Customers paying smaller invoices while larger invoices go unpaid.
- The customer fails to return your phone calls or shows annoyance at your inquiries.
- Your requests for information, such as updated financial statements, are ignored.
- The customer places multiple, large orders and presses you for a higher credit limit.
- The customer tries to coax you into providing a good credit report to another supplier.
- You get word that the customer’s credit rating has been downgraded.
Remember, great customers can have sincere problems paying a bill. By having a good credit rating system, you can more readily identify the customers you want to accommodate to pay their bills and those customers whose activity should be suspended because they are truly problem accounts.
You’re ready to take out a loan to buy a house, a car or get a credit card. You fill out the application and wait to hear back from your bank on its decision whether to loan you the money.
And then you get the dreaded phone call. Your credit score wasn’t high enough to approve the loan! Was there anything you could have done to get a higher credit score?
Getting and maintaining a high credit score is just like playing a game. But just like any game, you first need to understand the rules so you can create a winning game plan. Here are the rules of the credit score game you need to understand so you can get the highest score possible.
- Rule 1 – Pay your bills on time (Comprises 35% of your credit score equation). Payment history is the most important component of your credit score and is pretty straightforward – it’s a record of whether or not you’ve paid your bills on time.
Action: Don’t be late paying your bills! A one-time late payment may not affect your score, but multiple late payments will drag down your score. Even better, understand what vendors report your payment history and which ones do not.
- Rule 2 – Refrain from maxing out your credit (30%). Just because you have a $10,000 credit limit doesn’t mean you should use it all. Using close to or all of your credit limit signals to lenders that you may be a high-risk borrower. Insurance companies also love to use high-limit spending as a reason to increase your home and auto insurance, so be forewarned!
Action: Don’t use more than 25% of your available revolving credit, and pay the outstanding credit card balance in full each month.
- Rule 3 – Build a long history of using credit responsibly (15%). Lenders want to see a track record that you can handle being entrusted with a credit limit. If you have old credit accounts that are still open and in good standing, that signals your trustworthiness, which is reflected in a higher credit score.
Action: When you open a credit account, keep it active for as long as possible. If you stop using an account, consider leaving that account open, but only if it will help your score and not hurt you in obtaining new credit.
- Rule 4 – Use multiple types of credit (10%). Lenders like to see you with both revolving debt (credit cards) and installment debt (car and house loans).
Action: If you have a low credit limit, request a limit increase. Many banks will honor the request, especially if you’ve had a history of making on-time payments. If you don’t have a history of using installment loans, consider making a small purchase (such as an appliance or electronic device) using an installment loan.
- Rule 5 – Avoid too many credit inquiries (10%). Applying for many loans or credit cards in a short period of time tells lenders you may be attempting to acquire more credit than you can handle.
Action: Apply for only one type of credit at a time. Multiple inquiries for the same type of credit, for example a mortgage loan, within a short period of time will only count as one inquiry.
You can improve your credit score by understanding these rules and putting them into practice.