Credit Policy for businesses and how to extend credit and manage credit risk

Banks are toughening up on lending terms resulting in it being harder to borrow.  The economy has slowed to a crawl and banks are being tougher on credit score requirements and requirements for getting a line of credit. 

You should be doing the same with your customers, credit approved and new accounts.  Make sure your accounts are up to date and re-evaluate any credit limits on accounts that might be slower paying right now.

Things will get worse before they get better so this will help you to protect your business and your bottom line.

As you make collection calls you will be running into many excuses, you have to make sure you are ready for them if you want to get paid! Here is a scenario of how one call could go: 

Example: Debtor: I can’t pay, I don’t have any money

Collector: Are you working?

Debtor: Yes, but I just started a job and don’t get paid for two weeks.

Collector: What day will you get paid?

Debtor: Friday

Collector: Okay, then you can mail a money order for $25 on Saturday.

This example can go so many different ways depending on the debtor’s responses. You have to be positive and get them to agree to make a payment. Once you reiterate what is going to happen, send them a confirmation letter with a payment envelope. Then call them on Friday to remind them about mailing the payment. An example of what you could say could be:

“Hi this is Michelle from KTM Auto, calling to confirm you will be mailing a money order for $25 tomorrow, Saturday. “

Remember, as a debt collector you must do the following:

• Manage the emotional side

• Prepare your pre-call plan

• Make the opening statement

• Ask questions with precision

• Make the transition to the payment arrangement

• Handle Objections - You need to become familiar with common debtor objections. The best way to do this is to make collection calls.

• Closing the call - Your last statement should reiterate everything covered in your call. Repeat all actions that will be taken. Example:

“Okay, on Saturday you will mail a money order for $25 in the envelope I send you today. Then you will send $25 a month every Saturday until May 15th.”

You cannot be to clear and follow up is the key to success. If you don’t follow up on any of the above actions, you are wasting your time and money.

The Miami Herald printed an article about creditors versus collection agencies and the laws each must follow.

This has been something that has been getting a lot of attention lately, some business owners aren't sure if they have to follow the FDCPA or if that is for third parties (such as collection agencies) and not them as creditors.

The FDCPA broadly defines a debt collector as "any person who uses any instrument of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another."

While the FDCPA generally only applies to third party debt collectors, not internal collectors or credit managers for a creditor or business owner, some states (such as California) have similar state consumer protection laws which mirror the FDCPA, and regular original creditors.  So be sure you check your states laws and the laws in the states you are collecting in. 

Tax rebate checks have starting being deposited and being mailed! What will you do with yours? These checks are supposed to be to spend on "fun" items in order to boost the economy.  Most poeple won't be doing that!  Here are the top 5 ways to use your check:

1.  Invest in your career, take a class or learn something that you can add to your resume and make you a more valuable employer or employee.

2.  Pay down high-interest debt, get rid of anything you can or at least lower the balance!

3.  SAVE - add to your emergency fund!

4.  Invest some of it, in a CD or an IRA.

5.  SPLURGE! Just a little, pay off a big debt and then use a small portion of your rebate to reward yourself or your employees. Recognition goes a long way!

Today I am pleased to have Krista T Walsh the President of KC Collect! and a member of my Credit & Collections Association as my guest blogger! 

Many business owners, especially NEW business owners, are so eager for a sale that they neglect document or discuss payment. The business does want to offend the new customer by asking for a method of payment. If it is difficult for a customer to obtain credit, they will take their business elsewhere. Lack of proper credit policies is the major reason that businesses have overdue accounts. Small Businesses are infamously guilty of having a week or non-existent collection policy. Some businesses have a policy, but use it inconsistently, which yields less than favorable results. As one of the keys to any successful business, receivables management must be taken into consideration when venturing out as an entrepreneur. Unfortunately this key element is often overlooked as the entrepreneur’s attention is pulled in different directions.

If you obtain as much information as possible from the customer when extending credit makes recovery of the account more likely if it becomes past due. In order to successfully manage debt it is customary to ask potential customers for credit references. In smaller communities it is suggested that you network with fellow companies, thus creating a mutual exchange of information. Most companies are more than willing to share information on past delinquents to help you to learn from their mistakes.

Hopefully your customers will pay you with their Government Rebate checks!  A story in the Wall Street Journal yesterday tells us that many consumers want to go out and make purchases of things they want, like new televisions or vacations but that because of the soaring food and energy prices they have to use this rebate money for bills.

Not exactly what President Bush had in mind.  These “rushed” stimulus checks being sent out when the economy is still reeling from declining house prices, and consumers are under even more financial pressure than they were in January when this stimulus idea was developed is causing the idea to backfire. 

Most consumers will be using this money to buy gas, fuel, food and pay off bills. Nothing that will help stimulate the economy.  In my opinion this is the “idea” from someone who has no idea what is going on in the lower and middle class, otherwise this would have been more thoroughly thought out and a better plan would have been put in place.

Reminds me of when Bush spoke to the nation after 9/11.  “Go on vacation” he said.

I don’t believe many consumers will be using their stimulus check for vacations, and this can work to your advantage if you have customers that owe you money.

Checks have started being directly deposited into consumers bank accounts, find out when your past due customers are getting their checks and ask them to pay you with some or all of that money.

Good luck!

Most Entrepreneurs don’t realize that their personal credit is crucial to their ability to successfully run a business.  When you first start a business your personal credit is what is used to determine the types or if any credit will be extended to you.  Your personal credit will also affect the rates at which credit is extended to your business. 

Credit is something that is hard to come by right now and will be harder to come by in the coming months.  

Since you are just starting your business, it doesn’t have any credit built up, which is why your personal credit is used until you can build up credit for your business. 

Some businesses are not considered separate from the owner so the credit is shared, those are sole proprietorships, general partnerships and limited partnerships.  Even though you have a taxpayer ID number for your business, your personal credit and social security number are still used to determine your business creditworthiness. 

Your best strategy is to talk to a few banks, credit unions or invesotrs if you need a business loan and then decide where to apply based on many different factors including the interest rates offered. With lenders tightening their standards because of the state of the economy, make sure you have all your ducks in a row before applying for credit anywhere!

Yesterday's Wall Street Journal reported that credit card companies are cracking down on their credit approval process.  The Federal Reserve wants to restrict some common moves by credit card issuers, such as raising interest rates on troubled borrowers.  Proponents say that these steps would curb abusive practices and opponents say the new rules could unravel innovations that allowed card issuers to price risk accurately.

Credit card companies have been receiving criticism on their hidden fees and unfair interest rates and the raising of those rates on borrowers.

How does this affect your business?  

Have you taken steps to change the steps your company takes when it extends credit, or charges late fees or offers discounts?

Be very careful when offering credit and be sure to check each applicants credit with a fine tooth comb. Do not extend credit if you have any doubts, now is the time to tighten up your credit polices in order to protect your business. 

Last night I had the pleasure of being on a live radio show called “Today’s Author” with David Ewen.  The show was about my new release, the 3^rd edition of Starting a Collection Agency, how to make money collecting money, and went very well.  Please take a moment to listen to the broadcast!

In addition I want to share some exciting news about my new book, it has been entered into three prestigious contests, two of which the 2^nd edition won when it was released!  This is so exciting to me, since it is up for those awards again and another new award.  The awards are the National Best Books 2008 Awards, the 16^th Annual Writer’s Digest Self-Published book award and the New York Book Festival.

I try to provide updated, quality information to my readers and am always so happy when the feedback is good and people find what they need in my books. I love getting emails and letters from people who say that my books helped them to start their own business and how great they are doing!!

I also want to thank everyone here at Know More Media for all their support and for posting about my new book on their blogs! 

Today, the Wall Street Journal reported that bad debts prompt a change in billing and that hospitals are demanding cash up front from their patients.  Traditionally, hospitals bill patients after they receive their care, but now with more increased bad debt and charity-care costs, hospitals are asking patients for money before they get treated.

Unpaid bills for care given costs the hospital industry $31.2 billion in 2006 according to the American Hospital Association. 

If you have a large amount of bad debt you may want to think about offering a discount if someone pays cash at the time of the sale, protecting yourself and saving your customer money.  With the economy in turmoil and more and more people wanting to decrease the amount of bills they have, this could work to your advantage and be a win-win situation for you and your customer.