Module 7 • Control 6. Credit control


A small business manager will be confronted with “credit” sooner rather than later. Firstly, the business’s needs to finance operations involve the possibility of credit. This could be in the form of: • Bank overdraft facility • Suppliers’ credit • Hire purchase • Leasing


Secondly, once your business is up and running, customers will inevitably apply for credit. This makes the determination of a credit policy a must. The reason is that allowing credit to customers is very costly and if not managed well, can lead to business failure. Therefore, business people’s advice is always to avoid allowing credit as far as possible. The nature of a particular business and the customer profile will determine whether this is possible. Fast-food businesses and service businesses like hairdressers generally speaking, do not allow credit. The amount that an individual spends is so small and customers can be expected to pay immediately. However, if your business only has a few clients buying large volumes of products or services, then credit requests will be forthcoming


Credit is also used as a customer service to gain a competitive advantage. Customer loyalty through dependency can be another reason for allowing credit. This means, that if you started to buy on credit from a business, you will probably continue to do so. Therefore, the aspects that follow must form part of your credit policy.


6.1 Credit policy


1. Credit period (the time it takes the customer to pay) The credit period must be decided on and be part of the credit agreement. The period is normally 30 days but can be longer. The credit period must be affordable to the business. Therefore, the cost associated with the length of the credit period must be taken into consideration before deciding. The cost is discussed in the next section.


2. Credit standards Most businesses rate customers for credit purposes. This is done to decide on aspects like credit limits and the credit period. It is also used to decide whether it is too risky to allow a customer to buy on credit. The following are possible criteria when screening a customer: • reliability • size of their account • financial ability • credit standing with other businesses (trade references)


3. Collection policy


The business must decide on how they are going to collect the outstanding money. The following must be taken into consideration: • Will customers receive a monthly account? • What forms of payment are acceptable? • If customers fail to pay, how long is the period before you hand them over? • Who will handle your bad debts?


4. Discounts


Discounts are normally used as an incentive for customers to settle their account sooner rather than later; for example: if a customer pays within the credit period, a certain percentage discount will be deducted. This relates to what it will cost your business to finance an extended credit period. Customers must be made aware of such incentives.


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