Extending credit, what you need to know

There are a number of things that you need to know about extending credit as a company to your customers.
Extending credit to customers is one of the most effective ways that you can actually increase your sales output, particularly when you are trying to break into new markets, whether geographically or demographically. How does extending credit get you new business? Think of it this way. You know that a number of potential clients would purchase your products or your services; however, these clients might not have the money at this point in time. So you advertise that clients can buy now, and pay later. Clients come in, and you extend credit to them so that you can have their business right now, and the hope is that they will make their payments on time so that you can also have their money in the future.
However, extending credit can be a complicated and a risky proposition. There are a number of things that you need to know before you begin extending credit.

One of the first things that you should know about extending credit is that you will probably at some point in time make a bad loan or extend bad credit. However, if this is done, you need to be aware of the situation and that you should make every effort to have a strong follow-up system in place so that you can collect the debts that are owed to you by clients.
Before you begin extending credit to customer, you need to understand what you need to do when you are evaluating whether or not you should extend credit and to whom you extend that credit. Every time a customer comes in and applies for credit, you need to be able to evaluate the risks of extending that customer credit. You also need to be compare the rewards and benefits of that sale to the potential risks. Does this customer regularly pay back debts on time? Does this customer already have substantial debt? Does this customer have a history of simply purchasing "buy now pay later" merchandise, and then defaulting on loans?
So you need to train yourself on how you can recognize high risk clients and how you can recognize clients who have fantastic credit.
When you decide to extend credit to customer, you need to decide what the terms of that credit are going to be, and what the length of the loan will be. To whom are you going to extend credit? All customer? Just wholesale customers? Will you extend short term or long term credit to your customers?
If you extend credit to customers, you need to set up an organization within your business that will able to determine credit ratings, can keep track of the different accounts of all of your customers, and will be able to keep up with late payments. This means that you need to have a well organized and streamlined system that will make it easy for you to know when you need to start sending out collection letters and when you need to call a collection agency.
One of the best ways for you to determine whether or not a customer is a viable credit risk or benefit is to require customers to fill out a formal credit application. If you feel a little bit uneasy about requesting a formal credit application, at least ask for as much information as you need. Ask about place of employment, place of banking, and name of a contact relative so that you have a way to figure out how to reach the customer if he or she decides to skip out on the loan.