How do I decide whether to offer my customers credit?

Everyone knows that offering credit can increase sales. People spend more when it is on credit and also it can establish a business relationship with that customer who will shop with you more often if they have a credit account for convenience. But offering credit is also a risk if your customer doesn't pay. This can cost you not only the amount borrowed but also any fees used to collect the money from them later.

So it is important to establish a policy in your company determining when to offer credit to your customers. Here are some things to look for in a potentially good credit customer and ways to help them stay good credit risks.

1. Credit Score- The FICO score is the most common measure of a persons credit worthiness. It measures payment history, debt amount, account balances and frequency of credit requests. This number is somewhere between 850-300. Anything above 700 is exceptional and a great credit risk. Above 600 is more risky and anything below 600 is a strong credit risk.
2. Repeat business- does this customer do business with you often? Would giving them credit increase the likelihood that they will do more business with you?You might be willing to take a riskier FICO score with a customer that will do more business with you.
3. It is illegal to use anything but credit-related information to determine whether your customer can have credit. The Equal Credit Opportunity Act prohibits the use of race, religion, gender, marital status, and birthplace to measure credit worthiness. And you can be sued if you appear to be basing your decision on anything but credit history related information.
4. Customer's situations can change so you need to be reviewing your credit customer's payments frequently. Any change in payment should raise an alarm that they may be struggling to make their payments. Being aware before they become too late can help them get arrangements made to get them back on track before bankruptcy or other things cause them to default.
5. When having customers apply for credit make sure you collect enough information. You need these pieces of key information from each customer before you can offer them credit.
- Full name and address
- Phone number and cell phones
- At least 2 references not living with them
- SSN or Tax Id number
- Income
- Other debts including cars and mortgages
- Amount they are requesting
- Whether the loan will be secure or insecure and value of security
- Co signer or co maker of loan and the above information on them
6. Make sure your payment terms and consequences for late payments are clear upfront. Make sure your customer signs all documents for legal action if they default.
7. Send out your billing statements in a timely manner and make sure you have a coupon type attachment for them to send in with their payment. The easier you make it for them to pay the more likely they will do it. Make sure you help them by offering a 24 hour drop box. Nothing is more frustrating to the customer trying to pay than arriving at your business only to find you closed an hour ago. Make payments easier by having a drop box for them to leave their payment for you.
8. Don't allow customers to exceed agreed upon credit limits without further application and consideration.
9. Make sure you update customer information with each business contact. Whether your customers are being contacted with a new promotion or for collection on bill make sure you update their address and phone number so you don't lose them.
10. Make sure you have a stop business list so that you don't continue to offer goods or services to those who are late on their payments until they have caught their bills up.

Offering credit can really increase your sales but make sure you use these 10 tips for choosing which customers to offer credit.