Understanding Your Credit Options

A lot of people will tell you that, as a business owner in today's economy, you don't have any choice but to offer credit to your customers. They'll tell you that credit is as essential to business success as oxygen is to breathing. Well, they're mostly right. But it's not an absolute rule for every business, particularly for smaller businesses with fairly small customer bases.

Don't fall into the trap of thinking that you should offer credit just because everyone else does. As you'll see as you go through this discussion, trying to collect from those who don't pay you can be extremely time-consuming, costly, and frustrating.

Should you offer credit to your customers? Your decision on whether to extend credit to your customers won't involve a lot of complex analysis. It'll be based mostly on good common sense. If the benefits of offering credit, such as increased sales, outweigh the costs of offering it, such as the risks and costs of nonpayment, you should offer it. If not, you shouldn't. Just don't forget that if you extend credit freely and don't get paid, it won't matter how much new business you generate.

Guiding principles. In deciding on a credit policy, you should be guided by the following principle: if you can demand cash up front, and your customers are willing to give it to you, that should be your policy. If that's not possible, follow this principle: get as much of your payments up front and in cash as possible. In other words, extend credit only if business conditions demand it.

• Consider the factors that will come into play in determining the likelihood that you'll have to offer credit.
• Figure out which types of credit are best for you, if conditions will demand it for your business, as they do for most others (particularly those that sell mostly to other businesses). There are several from which to choose: credit cards, checks, and a wide variety of credit terms (payable in 30 days; half in cash up front, the other half on delivery; 10 percent down, the remainder within 60 days; etc.).