I have many clients who offer credit to their customers in their businesses and the only similarity the have to each other is that their Accounts Receivable has doubled over the past five years. They all have had many uncollectable amounts included in their Accounts Receivable for companies that can’t pay them, or are now out of business. A few of these past due accounts are good customers who have had financial issues and are working diligently on paying off their debts. Although the business owners want to help their customers, they need to consider the viability of the business so they can continue to employ the staff and have a profitable business.
I’ve been advising and all my other clients to limit or eliminate the amount of credit they give to their customers for the following reasons:
- To reduce or eliminate bad debts in the Accounts Receivable
- Most business owners and their staff do not have the time or expertise to evaluate a credit history or credit report and set reasonable credit limits. Therefore they give credit too often to those who cannot pay their debts.
- Many business owners and/or bookkeepers are not good at collecting and following up on delinquent accounts, so a late payment often becomes a bad debt without any follow-up.
If you are not going to give your customers credit, there are several options that you should consider:
- Have customers pre-pay for products and services.
- Have customers pay upon delivery for products and services
- Transfer the risk of loss to a 3rd Party
- Accept credit cards – Merchant fees paid are usually less than bad debts and this method will also increase current cash flow.
- Refer customers to a financing or leasing firm.
Although giving credit is the norm in many businesses, I have seen a shift in this policy over the last few years. As businesses change hands, new owners do not extend credit and they do not lose customers as a result of this policy.