There are many reasons why you grant credit terms to your customers. For starters, the customers tend to do business with you when cash requirement isn’t stringent, which improves cash flow. They also appreciate the luxury of being able to pay on credit which fosters loyalty and goodwill. However, is customer credit always a good idea? The answer is “no.”
The benefits of credit granting don’t quite overshadow the drawbacks. There is always the risk of a customer placing a large order on credit only to decline the payment when the time comes. So, your customer credit and early payment solutions must involve a diligent process. For that, you can take the following steps:
Step 1: Ask the Customer to Submit a Credit Application
To make an informed decision about granting credit to a particular customer, you want to have all the relevant details with you. The best way to do that is to have the customer fill out and submit a credit application. It should contain details like the legal name of their business, banking information, order history, etc.
Step 2: Look into Trade References
Ask your customer to provide a list of trade references so that you can pick a few traders from the list and inquire about the customer’s payment history. You would want to ask the appropriate questions like whether the customer has a history of timely payments, and whether there were any payment-related disputes, etc.
Step 3: Check Business Credit Rating
There are various reputed and reliable credit bureaus in India such as CIBIL, ICRA Limited, Experian, Crisil Limited, etc. which provide credit ratings of various businesses. You can approach one of these that has the credit records of the customer in question. Since these institutes have advanced credit rating algorithms and resources, they can provide an accurate credit record of the customer for you to review.
Step 4: Set Credit Limit and Repayment Terms
For the sake of your organisation, you have to treat your customers differently, at least as far as customer credit is concerned. So, for the customers that have been doing business with you for a long time and have a high credit rating, you can set a high credit limit. However, for new customers, especially if they don’t have a good credit history, you want to keep the credit limit low. You should also lay out the repayment terms so that you and your customers are on the same page and there are few to no disputes in the future.
You Can’t Be Too Careful
Credit granting has its benefits but not without the risks. So, make sure you are careful with the process and try to make decisions on the basis of facts rather than your “gut feeling”.