In today's business world, offering credit has become common among companies of all sizes. It allows businesses to attract and retain customers, increase sales, and ultimately stay competitive in the market. However, extending credit also comes with risks that can harm a company's financial stability.
The dilemma for businesses then becomes finding the balance between offering credit to customers while minimising the risks involved. This is where effective credit management strategies come into play, as they can help businesses navigate this balancing act and ensure that their receivables are protected.
To understand how to effectively extend credit without risking receivables, this guide will cover the following topics:
By the end of this guide, businesses will have gained valuable insights and practical tips on maintaining a healthy balance between extending credit and protecting receivables. Let's dive into the details!
The first step in effectively extending credit is understanding your customer's creditworthiness. This includes assessing their financial history, payment behaviour, and potential risks affecting their ability to pay.
Some ways to evaluate your customers' creditworthiness include conducting credit checks, requesting references from other businesses they have worked with, and analysing their financial statements.
Credit checks are a normal part of the onboarding process and can provide valuable information such as credit scores, payment patterns, and outstanding debts. This can help businesses make informed decisions about extending credit to a particular customer.
However, there's no reason to restrict credit checking to new customers. It's essential for businesses to regularly review the creditworthiness of existing customers as well, significantly if their payment behaviour changes over time.
There are various methods businesses can use to conduct credit checks, including:
Regularly conducting credit checks using these methods will help businesses stay on top of their customer's creditworthiness, allowing them to make informed decisions about extending credit.
Credit terms are the foundation of a credit policy and significantly impact the risks involved in extending credit. It's crucial for businesses to establish clear and concise terms when offering credit to customers.
Any ambiguity in these terms can lead to confusion and disputes later, potentially harming the business's financial stability.
Some essential components of credit terms include:
By setting clear and reasonable credit terms, businesses can effectively manage the risks of extending credit while maintaining a positive relationship with their customers.
Here are a few tips businesses can keep in mind when creating credit terms:
By following these tips, businesses can establish clear credit terms that benefit both parties.
A one-size-fits-all solution is rarely effective when it comes to extending credit. Businesses must consider different customers' varying financial situations and offer tiered credit limits accordingly.
For example, a customer with a strong payment history and stable financials may be eligible for a higher credit limit than a new customer with no prior history. This approach allows businesses to minimise risks while offering competitive credit terms.
Businesses can also periodically review and adjust these credit limits based on the customer's payment behaviour. This ensures that the limit remains appropriate and reduces the chances of bad debt.
There are several benefits to offering tiered credit limits, including:
These benefits make tiered credit limits valuable for businesses looking to extend credit while protecting their receivables.
To effectively set and review credit limit tiers, businesses can consider the following strategies:
By following these strategies, businesses can effectively manage and adjust their credit limit tiers to minimise risks and maintain healthy customer relationships.
A proactive approach to invoicing and follow-ups can significantly reduce the risks of extending credit. Timely invoicing and regular follow-ups encourage customers to make timely payments, minimising the chances of delayed or non-payments.
Businesses can also consider setting up automated reminders for overdue invoices to remind customers of their payment obligations. This approach saves time and effort while ensuring businesses stay on top of their receivables.
Furthermore, consistently following up with customers regarding late payments shows a commitment to managing credit responsibly and can improve customer relationships.
While taking a proactive approach makes a huge difference, it can be time-consuming and labour-intensive. That's where credit management software comes in, automating the entire process for businesses and ensuring efficient credit control.
Chaser's credit management software offers features such as:
With Chaser's credit management software, businesses can streamline their invoicing and follow-up process, freeing time to focus on other critical tasks while ensuring proactive credit control.
Here are a few best practices businesses can follow for effective invoicing and follow-ups:
By implementing these best practices, businesses can stay proactive with invoicing and follow-ups, reducing the risks of extending credit while maintaining healthy customer relationships.
Extending credit can be a beneficial strategy for businesses looking to grow and attract customers. However, it's crucial to establish clear credit terms, offer tiered credit limits, and stay proactive with invoicing and follow-ups to minimise the risks involved.
By following these strategies and best practices, businesses can effectively manage their receivables while maintaining positive customer relationships, ultimately achieving the balancing act of extending credit without risking receivables.
Businesses should carefully consider these factors when establishing a credit policy and continuously review and adapt it to ensure its effectiveness. Further research and analysis of customers' payment behaviour can also help businesses make informed decisions about extending credit to minimise risks.
With proper management and careful consideration, extending credit can be a valuable tool for businesses to drive growth and build strong customer relationships.
For more information on how Chaser can help your business with credit control and receivables management, request a demo with one of our experts or start your no-obligation 14-day free trial today.