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When Should You Extend Credit?

Provided by Visa, Content Partner for the SME Toolkit

Make Sure You Get Paid

When you invoice a customer and require payment within 30, 60, or 90 days, your business is extending credit. You may not feel like you're extending credit—after all, you're just waiting for payment—but from a legal perspective, you're making an unsecured loan. (A secured loan is one in which the borrower would pledge property as a collateral for the loan.) The problem with unsecured loans is that they're … well, unsecured. If the customer doesn't have the money, it won't do any good to sue, because there will be nothing to recover. If the customer goes bankrupt, you're out of luck. Here's a short checklist to ensure getting paid.

  • Accept payments via credit or debit cards.
    Credit and debit cards— with a payment to you account within 3-5 days —have the potential of removing you from the collections business (and they provide additional benefits of flexibility and convenience).
  • Check the creditworthiness of new customers.
    You can get credit research from companies such as Dun & Bradstreet and others.
  • Use a credit reference form.
    A good credit reference form should ask who is in charge of the business, who to contact when problems develop, how much credit the applicant is seeking, other firms with which the applicant has done business on credit, and any other information needed for making your decision.
  • Analyze for credit risks.
    How do you tell whether the customer is a risk? If a customer has one or two minor credit blemishes—perhaps the result of an unexpected growth spurt—that should not necessarily be the basis of denying credit. But watch out for a client or customer with a record of not paying bills.

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