Credit and collections for small business

Credit & Collections
For Small Business
BUS 204 Credit & Collections
Spring 2006
copyright, SJH


What is Credit?
• It is “credit” that makes the
world go round, not money!
• Much of what is bought and
sold is not paid for in advance,
but after the delivery of goods
or services.
• In other words, the seller is
taking a chance.. Trusting that
the buyer will pay at a later
date.

CREDIT: a
system of doing
business by
trusting that a
buyer will pay at
a later date.


Types of Credit
• The two general categories
of credit:
CONSUMER CREDIT

TRADE CREDIT
Consumer credit is extended
from retail stores to the
customer.
Trade Credit is extended from
one business to another
(wholesaler to retailer).


Reasons to Extend Consumer Credit
 To attract new customers
 To increase sales
 To offer convenience &
customer service to clientele
and encourage them to come
back.
 To make a profit from the
interest.
 For cash flow reasons.


Credit as a Pricing Strategy
A major reason to extend
credit is for a marketing,
or more specifically, a
pricing strategy.
By offering installment or
deferred payment plans
the buyer is provided with
a more comfortable

alternative for getting
what they want.


The RISKS of extending Credit
 The Owner could lose money if
the buyer does not pay the
amount promised.
 The Owner needs to pay the
cost of the goods or services
in advance.
 This means the owner must
have sufficient working capital
or money on hand to finance
the time period.


The RISKs of NOT extending Credit
 Loss of customers to
competition
 Lack of customer
satisfaction
 Not tapping into “impulse
buy”
 Not the industry standard
 Missing out on the
“Charge, charge, charge!”


Guiding Principles for Extending

Credit…Factors to Consider
• Your Industry- is it customary in your
industry to extend credit?
• Your CustomersAre you dependent upon repeat customers?
Do you know and trust your customers?
Do your customers have big buying power?

• Your Location- is it economically suitable?
• Your Transactions- (number of
transactions and the size $$$ of
transactions)
• Your Financial Condition- extending credit
may be limited if your credit is not good


Extending Credit Options
Credit comes in many shapes & sizes..
 Offer to accept checks (still
involve a risk)
 Offer to accept credit cards
 Credit Terms (B2B or
Wholesale)
 Offer a revolving charge
account
 Offer installment accounts
 Enable customers to
finance their purchases with
outside finance companies

We proudly accept

Visa, MasterCard,
Discover Card,
American Express…


Installment & Open Charge
Accounts
• Installment Accounts allow a customer a
long time (often several years) to pay for bigticket items. The monthly payments include
repayment & interest. This financing is
common at furniture & appliance stores and
for vehicles.
• An Open Charge account allows a certain
length of time (30 days), interest is normally
not charged. This was common for “general
stores” and is still utilized in smaller towns
today.


Revolving Charge Accounts
• A Revolving Charge Account allows the customer a
specific amount of credit.
• Purchases can be made at anytime, as long as they
do not exceed the credit limit.
• Monthly payments are required and usually include
an interest charge.
• The difference between “Revolving Charge
Accounts” and Credit Cards are:
1) with a Visa the seller gets the “cash” quickly
from VISA (even if the buyer has not paid

for all of it)
2) Revolving Charge Accounts are “in-house”


Progress Payments
• The customer pays for a certain percentage
upfront (33%) when signing the agreement.
• As the “project” progresses the customer
pays for an additional amount (33%).
• At the completion of the project the
customer pays the remaining 33%.
•Progressive payments work well for many
service companies.
•For larger projects (construction) there may
be more as many as 9 or 10 progressive
payments.


Accepting Credit Cards
In your Small Business


How Popular are Credit Cards?
• 70% of all US adults use credit cards to
make purchases
• Total Number of Credit Cards in
Circulation exceeds 1 billion!
• Average customer uses a credit card
5.5 times per week!
• Consumers use credit cards on $28 out

of every $100 on consumable goods
• Can You Afford Not to Accept Credit
Cards?


The Price of Accepting Credit Cards
The convenience of credit cards is not without cost!
• Typically business owners pay 2-6%
of total credit card charges
• Also, transaction fees of 5 - 25
cents
• Merchant cards are often on a
“multi-step” process depending on
monthly sales amounts
• Additional costs for leasing or
buying credit card equipment
• Be sure to factor all of these costs
into your pricing!


How a Merchant Account Works
In a nutshell
1. Your customer, the Cardholder,
obtains a VISA through an
Issuing Bank
2. You, the Credit Card Merchant,
obtain a Merchant Account from
a Sponsoring Bank
3. The Sponsoring Bank is really
offering you “an unsecured line

of credit”, and yes, you must
apply and show solid
creditworthiness-


Merchant Account Cycle part 2
4. You take the customer’s card, and process the sale
(possibly getting an authorization code from your
Sponsoring Bank.
5. Your Sponsoring Bank typically uses a Processor
to acquire the credit card transactions from you
and processes them through the Issuing Bank and
your Sponsoring Bank.
6. You get paid when the customer charges & when
you submit a deposit transaction credit card
receipt… this process is known as “settling”.
7. It may take a few days for the transaction to
process, and for you to obtain the money in your
account (minus the processing fee).


Merchant Card Responsibilities
• In submitting the deposit transaction, you are
promising the Issuing Bank that you will
deliver the goods to the Cardholder.
• These are the expectations or “trust” that
makes the cycle work.
• Sometimes there are glitches in the system
that you need to protect yourself from
1) The Cardholder doesn’t believe you delivered the

goods.
2) The Cardholder never ordered the goods
(stolen credit-card).
3) The Cardholder returns the goods.


Ways to Minimize “Chargebacks”
and other Credit Card Risks
• Keep good records….
• Sponsoring Banks have guidelines
that suggest you also obtain the
Cardholder’s phone number.
• Verify the card number and the
cardholder’s signature on every
transaction.
• Question shipping to an address that
is different from the Cardholders.
• Know your Cardholder personally.
• Advise shopper’s of your credit card
policy and return-warranty policy.


Minimizing Charge Backs
• Do not submit the deposit transaction
until you have “officially” delivered
the goods.
• If you need to prove that you DID
honor the transaction, do it in a timely
fashion.
• If you honor refunds, honor them

promptly.
• Check frequently with your merchant
account banker to make sure your
credit stays healthy!


Credit Basic Documents
• A written Credit Policy
• Loan Application Form
• Request for Credit
Information Form
• Purchase Agreement or
Purchase Order
• Loan Agreement
• Security Agreement (if
loan is collateralized)


Your Written Credit Policy
• Describes the terms and conditions
upon which you agree to grant
customers credit.
• Makes it CLEAR to the customer
exactly what will be involved before
going further with the transaction.
• Provides uniform guidelines to all
employees.
• Is a convenient checklist for owner to
remind themselves of the procedure.
• Should compare to terms offered by

competitors.


Sally’s Boutique Credit Policy
It is the policy of Sally’s Boutique to extend credit to customers
purchasing more than $100 worth of merchandise in a single
transaction, not to exceed $500.
Such credit will be extended provided customer agrees to a
credit check and has a credit score of 680 or above.
Payments may be agreed to be installments, but the
total term of the repayment shall not extend beyond one year.
Customer must complete a loan application form, a request for
credit information form, and must sign a loan agreement. Interest
charged shall not exceed 12% per year.
All credit extended to the customers and all transactions to be
paid on credit are subject to the approval of the owner of Sally’s
Boutique.
No item purchased on credit may be returned.
All items purchased on credit shall require at least 10% down
payment.
The owner reserves the right to not extend credit to any customer
and reserves the right to make exceptions to this policy.


The Loan Application
• Standard Loan Applications are available in
office stores.
• A full loan application should have the
following elements:
Name and street address (not PO)

Does the applicant own or rent?
Does the applicant have any other real
estate?
Name, address and phone of employer
Identify all checking & saving accounts


Loan Application Continued
Is the applicant a business owner? (if so,
name and address of business)
Is the applicant married? Is spouse cosigning?
Customer “Personal Financial Statement”
showing all obligations and all revenue
List of references
Questions on litigation or convictions
Finally, the application must be signed &
dated.