25th Jan 2013
By being clever with extending credit terms for certain customers, you can prevent late payments damaging your business. Max Firth, managing director, Business Information Services at Experian UK&I, explains how to do it.
Three big considerations for any business owner are knowing whether to give credit to a customer, how much to give, and the likelihood that the customer will default. Make the right decision and you can bring in more money by offering good customers credit extensions. Make the wrong decision and expose your business to bad debt and you could miss sales opportunities.
Armed with the right knowledge, not only at the beginning but also throughout your relationship, you can negotiate better and more informed credit terms. To make sure you’re in a position to set the best credit extensions to the best customers and re-negotiate prices with risky customers,. here are some top tips.
1: Refocus your management strategy
You need to view your accounts as a whole to fully understand where your credit risks and opportunities lie. Only when you know which customers can have a credit extension and which should be lowered, can you confidently renegotiate credit terms.
Remember: Most businesses target their customers based on an A-Z surnamemethod. If you knew which customers to talk to first, you could establisha more efficient credit management strategy that brings in more moneyfaster and reduces your bad debt exposure.
2: Audit your accounts on a regular basis
Regularly auditing your credit risks is an essential part of being an effective business owner. By reviewing your customers’ payment behaviour regularly, you can renegotiate a customer’s credit limit based on up to date payment trends and their current financial situation.
Remember: A customer’s financial situation can change at any time, so credit termsthat were right at one time, may become too high or too low very quickly. Witha customer’s payment history to hand while you review their account, youcan make more informed credit decisions.
3: Offer more competitive terms than your competitors
Customers are likely to have credit with your competitors as well as you. To get their business, you will need to offer better terms. Checking a customer’s payment trends and seeing how they are paying other businesses can help you negotiate more competitive terms and stay ahead.
Remember: A business will always need credit. To be successful, you need to strike the perfect balance between offering better terms than your competitors and limiting your risk exposure. Making the right credit decisions basedon up to date, accurate information will ensure that you arebringing in more money while protecting your business at the same time.
4: Know what your customers are likely to do next
Reviewing your credit limits is more than simply reacting to a situation. If you could understand your customers fully, you could make a long-term credit strategy based on likely future buying behaviour.
Remember: All businesses fall into types with specific traits and behaviour patterns.By grouping your customers accordingly, you can identify whichbusinesses are most likely to be profitable and loyal.
5: Build your confidence with vital information on-hand
A vital part of being a good negotiator is knowing how much you can afford to give and not going over it. The only way to achieve this is by knowing the ins and outs of your customers’ financial situation, and more importantly, having it easily accessible when you come to review a customer’s account. Armed with the right knowledge, you are empowered and can confidently negotiate credit terms and explain your decisions to customers.
Remember: When you are equipped with all the information you can confidentlyextend or reduce a customer’s credit limit. Without having all the facts,you could miss vital information that would influence your lendingdecisions and cause you to miss up-sell opportunities or offer too much credit that increases your risk exposure.