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Terms of Credit!

March 2009

Selling on credit can be risky so your Accounts Receivable plan must be well laid out. What payment methods will you accept? What are your terms of credit? How will you determine a sound risk? How will you monitor receivables and aging accounts? What steps will you take to collect outstanding payments? What is your recovery plan for a bad account? Who will be responsible for doing this work?

Here are a few key steps to help with your planning…

1. Know the standard practice and payment methods for your field of business, i.e.:

• cash only

• cash on delivery (C.O.D.)

• consignment

• credit

• patient billing

• insurance or health care payment

2. Establish your business terms of credit, i.e.: net 10 days from invoice date net 30 days from shipment date

3. Communicate your business terms of credit clearly on all shipping papers and invoices.

4. Request a formal credit application including banking details and credit references.

5. Request a signed credit agreement form.

6. Complete a credit check on all applicants.

7. Keep a close track of days outstanding on aging accounts (0-30, 31-60, 61-90, over 90).

8. Have a recovery plan in place:

• 0-30 days: invoice issued
• 31-60 days: duplicate invoice with followup telephone call to determine if alternative payment schedule is required
• 61-90 days: written notice of impending credit collection action and follow-up telephone call to determine if alternative payment options are available
• over 90 days: credit collection action

9. Assign account receivable collections to an administrator, i.e.:

• bookkeeper
• accounting department
• partner (spouse).

Once your AR plan is established, stick to it! You are in business to do business and your clients know it. When you decide to extend credit to new clients make sure to provide your Terms of Credit to the client in writing and to have the client sign a credit agreement.

When necessary, regular follow-up with outstanding accounts sends a powerful message that you are serious about collection. Your creditors will respect you for it. If the unlikely occurs and a credit account lags in payment, you have options available to continue business cautiously:

• Partial payment with each new order, balance due in 30 days

• C.O.D.

• Full payment with each new order.

Unfortunately, if a worst case scenario presents itself and an aging account goes past 90 days due, you will have to make a serious decision on whether to collect or to abandon the account. Either way marks the end of your client relationship.

Once an account is turned over to a collection agency, you have in essence sold that account. You will not be required to take further action on your own. The agency begins an aggressive recovery process and will keep up to 50% of the recovered debt as payment.

Alternatively, you can take the client to small claims court and hope to recover and keep the full amount owing for yourself. You will, however, have to decide whether to hire a lawyer or to act on your own behalf.

The collection process is time consuming and very costly. Therefore, it is best to protect yourself by investing the time and effort up front. A well laid plan coupled with business appropriate procedures will go a long way to reduce your risk in extending credit.

Diane Cassman is a veteran Communications Specialist, with years of experience writing articles, publications and speeches for both corporate and non-profit audiences. She is as adept at writing annual reports as she is at appealing for contributions. Diane studied Interior Design at Sheridan College in Oakville, Ontario and has shared her expertise in decorating and business practices throughout the years.
You can reach her via email: dianecassman@hotmail.com

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