Invoicing Customers and Extending Credit
by
Attorney Richard Stim
When and how to extend credit to your customers.
If you’re a professional service provider (such as a consultant or accountant) or you sell products to a wholesaler (a company that places your goods in retail accounts), then you probably invoice your customers. An invoice is a bill that sets the terms for payment. When you invoice a customer, your business is extending credit.
Extending Credit to Your Customers
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. (An unsecured loan is one which the borrower does not pledge property as collateral for the loan.) The problem with unsecured loans is that they’re… unsecured. If the business doesn’t have the money, it won’t do any good to sue, because there will be nothing to recover. If the business goes bankrupt, you’re out of luck.
If you have doubts about a new customer, you can check on their creditworthiness by having them complete a credit reference form. A good credit reference form requires information about who is in charge of the business, who to contact if problems develop, how much credit the applicant is seeking, other firms with which the company has done business on credit, and any other financial information you need to make your decision. If it’s a big account and you’re investing a lot of resources (time, money, or supplies) in it, it may be worth it to pay for credit research from a company such as Dun & Bradstreet (www.dnb.com), BusinessCreditUSA (www.businesscreditusa.com), or Equifax (www.equifax.com).
Evaluating Credit Risk
After a potential customer fills out a credit reference form, how do you tell whether the customer is a credit risk? That will be a personal call based on the size of the business and its credit history. Collections expert Timothy Paulsen suggests separating patterns from single events. 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. That is different from evidence that indicates the client or customer just doesn’t like to pay bills.
|
