How To Safely Extend Credit to Customers

Extending credit to customers can be a delicate subject when it comes to running a company. While it can bring massive benefits to both your customers and business, such as boosting sales and company reputation, there can be potential consequences in terms of cash flow and risk.

Now, with the ongoing pandemic from COVID-19, the issue of extending credit is more relevant than ever, with many customers requesting credit. If you are experiencing this, or are considering extending credit, here is a guide on how to safely do so.

Do your research on your customers’ credit history

Whether this is done through a credit application that requires things like financial statements and credit references, or obtaining a consumer credit report, it’s important to make sure that your customers are creditworthy. It’s not always enough to rely on what your customers tell you about their finances, so creating a process that allows you to look at the hard numbers on top of what your customers say will allow you to make the best possible decision.

With COVID-19, you may want to consider making some special considerations for your customers, like making your credit policy more lenient to account for the fact that customers, for example, might currently have less income. However, do be realistic about how creditworthy your customers actually are! Also, make sure to thoroughly consider the current cash flow of your business before extending credit, especially with the ongoing pandemic.

Create a clear credit policy

Setting up a clear credit policy is very important to ensure that both you and your customers are aware of how extending credit works before the credit is actually in use. Make sure that your customers can easily find information on when their payments are due, interest rates and the penalties for late payments, as this will help you get paid on time.

Your credit policy should also include information about the collection process, which will be the guidelines you’ll follow when collecting late payments. You can send your customer an invoice as a follow-up, although it’s far better to contact the customer via phone — The key is to follow up regularly. Alternatively, you could use a third-party collection agency to chase late payments. It’s completely up to you what you do, but remember that while it is difficult being the bad guy, you can’t be too lenient when dealing with late-paying customers. This is where a well thought out collection process helps.

Note that you can definitely tailor your credit policy to different customers! For example, you can offer better credit terms to customers who have supported your business for many years, as not only will they be more likely to pay on time, but it will also serve as a token of appreciation for their business.

If you’re unsure about how to assess your client credit, you can always sign up for free at Zetl and get an indicative rate of financing for your client, no obligations.

Offer multiple options for your customers to pay you

Some examples include online payments, payments by mail and payments by phone, on top of more conventional methods like credit card and checks. This is particularly relevant especially during the pandemic because your customers may currently be in lockdown or may want to limit their interactions outside, so offering options that allow them to pay from the comfort of their own home will give them greater flexibility and convenience.

As a general rule of thumb for credit cards and checks, do note that checks have some risk, as you won’t be able to get paid if your customers do not have the money. On the other hand, credit cards have less risk, as the bank collects the money for you.

Finally, bank transfers are the most common method of payment. However, a common issue we’ve seen in HK and Singapore is young companies struggling to get their bank account open in time. At Zetl, for customers who choose to take financing, we can provide them with a local bank account to invoice their clients with.

Extending credit can be difficult, but there are benefits that make it worth considering, like improving your sales and company reputation. By conducting thorough research on your customers, establishing a clear credit policy that can be flexible towards different customers and offering them multiple payment options, you can reap these benefits and extend credit to your customers in the safest manner, particularly in light of the ongoing COVID-19 pandemic.