Providing Customer Credit Facilities? Things you need to know
The business environment can be a tricky one because your customers may not always be able to pay upfront. Some situations may arise, requiring you to offer the customer credit facilities. However, before you do, there are specific steps you need to take to ensure that your customers will be able to pay. You cannot run a business on gut instinct, which is why you need to have structure in your processes. So what do you need to do?
Know Your Customer
You must run a Know Your Customer or KYC check. It allows you to know who you are dealing with. It is especially critical if you are dealing with a business as opposed to an individual. Some of the things you need to verify include address, ID, business owners, directors, among others.
Set up a Credit Policy
Your credit policy will highlight the terms and conditions of the credit agreement. It should be in writing because you can use it as a legal document in case anything goes wrong.
Clients should complete a Credit Application
A credit application is an essential document because it will give you a lot of relevant information. It would help if you had a good understanding of a customer’s background. The application will include information such as references, number of years in business, type of business, any outstanding financial obligations, among others.
Look at your customer’s Trade References
You collect references for a reason, and that is to provide you with additional information on a client. You must, therefore, take the time to talk to them and ask pertinent questions. Such include whether the customer was good at making payments, was he or she punctual, were there situations when he could not pay, did they communicate effectively, among other things. Some people will move from business to business, collecting debts, and never settle. You will save yourself from being a statistic if you take this simple yet critical step of talking to the references.
A Credit Check is a must
You will get the customer’s credit report from any of the Credit Bureaus. It will show you whether the customer keeps up with the payments, thus giving you a good indication of their ability to pay yours.
Get A Personal Guarantee
In the case that you’re extending credit without collateral, business owners should give you a personal guarantee. Request for a copy of his or her financial statements to determine whether they have sufficient funds that can handle payments if the business cannot.
Get a security agreement for the products
When you give a customer product on credit, sign a security agreement so that you can repossess the goods if they are not able to pay.
Extending credit facilities to customers is a process that requires careful thought from your end. You must take the necessary steps to do your due diligence to protect yourself. A KYC check is, therefore, an essential part of the process.