Small businesses and entrepreneurs often need help with credit management in the early stages of running a business. There needs to be more knowledge about clients and the market during this crucial period, which is challenging to juggle with effective credit management.
The thing is that poor credit management can cause cash flow issues and affect the business’s credit score in the long run.
Fortunately, there are steps that small business owners can take to ensure their finances remain in order and maintain a healthy level of cash flow. These can prevent your business from going into debt and help you manage your risk.
Here are some steps you must consider to ensure adequate credit management:
- Consolidate Your Debts
Debt consolidation is the practice of combining multiple debts into one loan. It’s an excellent option for small businesses to manage their debt and reduce the interest they pay on each loan.
Businesses can get debt consolidation loans for bad credit online, allowing them to take a new loan to pay off existing ones. That way, you’ll only have one loan to pay instead of the numerous ones you have previously taken.
Debt consolidation loans have several benefits in credit management.
For one thing, it eliminates the late repayments on existing loans by immediately buying them out. Some debt consolidation loans have lower interest rates and better repayment periods than existing debts. Hence, you get more time to plan your finances and improve your credit.
Finally, you can use consolidation loans to pay off revolving lines of credit loans such as credit cards. The payment may reduce your utilization rate to under 30%, which is ideal for improving your credit score.
- Have A Credit Control Policy
Each business should have a credit control policy to reduce the risk of bad debt.
This policy should include details about customer assessment, payment terms, and collections. To assess customers before you offer them goods or services on credit, ensure they have a good credit history and can repay their debts on time. Also, establish clear payment terms upfront so both parties know the terms and conditions.
Finally, have a collections process in place for delinquent customers. Try to contact them and negotiate payment terms. If you need help, you can hire a debt collection agency or file a lawsuit against non-paying customers.
Typically, businesses can choose between having generous credit terms to entice customers or keeping strict control instead. Both approaches work fine depending on the customer and their repayment history. Established ones with better credit ratings can get more lenient terms, while new ones should have stricter terms.
- Use An Accounting Software
Bookkeeping is an integral part of credit management.
Accounting software makes it easier to keep records of payments made and received, which are the basis for making informed decisions about extending or limiting credit. Thus, businesses should use it to track their accounts receivable and payables.
The latest ones have tools that automatically send customers invoices and payment reminders. It eliminates the need for manual paperwork, saving you time and energy in dealing with customer credit management.
You can also use them to report delinquent payments to credit bureaus or sue them if necessary.
Additionally, accounting software can help you generate accurate financial statements essential for credit management decisions.
- Get People To Pay On Time
Businesses should motivate customers to pay on time and improve their cash flow.
You can do this by offering discounts or loyalty programs for early payments and penalties for late ones. For example, offer customers a 5% discount if they pay within 10 days of the invoice date and a 2% penalty if they don’t pay within 30.
Additionally, it’s important to track customer payments and ensure they meet their obligations. Automated payment reminders help you stay on top of your customers’ payments and get paid on time.
Once customers pay, you should also pay any outstanding debts to other businesses to maintain a good credit rating.
Getting paid and making payments on time helps your business establish a good reputation and allows you access to more credit in the future. Good credit history also helps build trust with customers and vendors, helping them keep their commitments.
- Conduct Credit Checks On Customers
Whenever you’re considering giving customers credit, you must do a credit check on them. It determines their ability and willingness to repay the loan.
Running a credit check also prevents businesses from entering into bad debt agreements with customers with poor credit ratings.
Business owners can use various methods to conduct credit checks, such as bank statements, credit reports from bureaus, and verifying references from previous creditors. These methods help them identify customers who can pay on time. On-time customer payments mean your business will have money to repay loans and run operations efficiently.
- Do Away With Bad Customers
Customers respond differently to different approaches when required to make payments. Some will pay when persuaded, others when threatened with legal steps. Meanwhile, some won’t pay in time regardless of what you do. After developing a credit policy and having a system to track customers, it’s easy to know which is which.
It’s best to fire bad customers who don’t pay on time or have a history of defaulting on payments. They can bring down your credit score if they continue using your services without paying on time. It should also save you the trouble of continuously following up on payments.
- Get Professional Help
Credit management can be complex, so there’s nothing wrong with getting professional help from accountants or credit experts. They offer services such as ensuring compliance with legal requirements and setting up effective policies.
Accounting professionals also have experience monitoring customer payments, setting up payment reminders, and negotiating for timely payments. A good accountant will keep your business’s credit history in check and help you track expenses, so you can make informed decisions about extending or limiting credit.
Good Management Is Key
Credit management is an essential part of any small business’s survival. Following the tips in this guide can improve your credit score and establish a good relationship with customers, vendors, and creditors, providing a solid foundation for your enterprise’s security and growth. Stay on top of payments and ensure consistent cash flow now.