Trade credit, is the practice of allowing customers to pay for goods or services they purchase at some point in the future, rather than paying upfront or on delivery. For example, 30 days are common payment terms – this means that customers must pay no later than 30 days after receipt of the invoice.
Many businesses just accept the fact that granting trade credit is an expected practice and go along with it, without taking steps to protect themselves from bad debt. Doing so, however, can be costly, as losses from bad debt can not only eat away at profit margins, but also jeopardise a company’s survival.
The key to success is finding the right balance between granting the proper amount of credit and appropriate payment terms to customers that can prove they are creditworthy, while limiting or denying credit and terms to those who can’t. Making this determination starts with a comprehensive credit policy that details how you will go about making decisions with regard to granting customer credit and setting payment terms.
Essential policy terms will cover running credit checks, contacting trade references, and setting appropriate credit limits and terms based on these checks and references.
Once credit has been granted and terms given to a customer, the credit relationship should be managed on an ongoing basis.
The biggest key to successful management of customer credit relationships is maintaining diligence. In other words, staying on top of customers’ payments and how they are impacting accounts receivable.
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