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Why Should my Customers Have to Apply for Credit?

Posted by Gil Oliva on Wed, Sep 03, 2014 @ 08:11 AM

Every time you offer your customer terms on their invoices, you are extending credit. Do you have an application procedure in place in order for your customers to qualify for extended payment? Or do you offer 30-day payment terms or longer as a matter of course?

BVF_blog_9.3If the answer to the last question is yes, you may want to rethink your policy. No matter what, your customers should be applying for the privilege of paying anything from 30 to up to 90 days past the due date of their invoice. A well-constructed credit application tells your customers you are serious, and may also make them feel more comfortable about doing business with you.

Establishing that your customer is creditworthy means collecting all the information needed should the account become delinquent. It is always prudent to be prepared for late or non-payment from any of your customers. There are certain references that help establish the security of each account, such as bank references and trade references. Using these references enables you to establish past history with creditors, and also how well financial commitments are handled. In some instances, it may also be worth asking if good customers with less than healthy references are prepared to sign a personal guarantee. Should their business go into default, they will be held personally responsible for any outstanding payments.

Make sure your credit application document is professional, and easily accessible, whether it is on your website, or a file that you send after initial contact, it needs to show you mean business! Credit should only ever be extended to customers who genuinely show an ability to pay, which more than likely means not every customer on your books. We have suggested the benefits of extending credit, and when it is a good idea, in previous blogs.

However, existing relationships are important. You may have customers who do not look strong on paper, but who have been loyal to your company and always pay on time. If you have not yet extended credit to these types of customers, a net 15 may be a great reward for loyalty. Should they not be consistent with payment, you can always revert back to payment on completion of the work. Similarly, should customers pay early, it may be worth considering some kind of early payment reward, to incentivize regular early payment activity.

The conditions and consequences of late payment should be made extremely clear to all of your customers. Customers who understand the process will be prepared should the situation arise where you have to enforce your policy to collect. It may also help to ensure on-time payment.

Lastly, your efficient invoicing behavior, and accounts receivable management process sends strong messages to your clients. If you are late with invoices, you are sending a message suggesting you will not mind if they are late with payment. Make it as easy as possible for your customers to pay, and always employ an open door policy.

It’s all about cash flow at the end of the day, and a great way of improving cash flow is to factor your invoices with Bay View Funding. Invoice factoring converts invoices into cash, quickly and efficiently raising money on your outstanding accounts receivable.  

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Topics: Cash Flow, Accounts Receivable Management, Credit Application

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