Sunday, September 03, 2000

Credit can be key to keeping, drawing customers

By Joyce M. Rosenberg
The Associated Press

        NEW YORK — Sooner or later, most new businesses must consider extending credit to customers. It's just part of doing business in our society.

        Depending on the size and type of your company, extending credit can be as simple as posting a Visa or MasterCard sign, or complicated enough to mean applying for credit yourself. Either way, a company can find credit to be a great tool, one that helps keep business coming in.

        If yours is a service or retail business and your typical charges run to the hundreds or low thousands of dollars, the easiest way to extend credit to your customers is by accepting credit cards such as Visa, MasterCard and American Express.

        Accepting credit cards eliminates many of the risks inherent in granting credit to customers. As long as you have complied with authorization procedures and taken steps to ensure that a customer isn't using a stolen or invalid card, you don't need to worry about nonpayment — that's the purview of card issuers.

        You will have to pay a fee equivalent to a small percentage of the charged amount, but the fact that you accept a card probably will mean more business for you. Customers like the convenience of not having to pay cash or write a check.

        But if your business is manufacturing or construction, or any other line of work in which prices and fees run higher than the amount typically allowed on a credit card, chances are you'll need to extend credit to customers by yourself at some point. And that means higher risks and burdens for your company.

        Before you can grant credit to customers, you'll need your own line of credit to finance your business while you're waiting to be paid, said F. Gordon Spoor, a certified public accountant with Spoor, Doyle & Associates in St. Petersburg, Fla. For example, if you're a manufacturer, you have to pay for materials and labor even before you've shipped your goods to customers — who generally won't pay until the shipment has arrived.

        In such businesses, “you can have a lot of money out front in anticipation of payment and if not careful, get stuck,” Mr. Spoor said.

        But with interest rates higher now than they were a year ago, it can be hard for a small-business owner, particularly one just starting out, to get that line of credit. Mr. Spoor advises seeking out an accountant or attorney who can help establish a relationship with a bank; once that relationship is in place, credit should be easier to come by.

        Mr. Spoor said the best time to get a line of credit is before you need it, simply because you might not get a large line at the outset. He said he tells clients “we'll get a $10,000 line of credit, extend it once and pay it back in full over the course of a year. Then we'll be able to get $15,000. Two years from now, we'll have an established relationship,” and banks will be more likely to lend more to help the business grow.

        Moreover, Mr. Spoor said, if businesses “don't get the credit line in place before they get into trouble (from nonpaying customers), they're not going to get it afterward.”

        A word of warning: Before you try to get a line of credit for your business, be sure your personal credit history is good. Banks will look at how you've handled personal finances before deciding whether to take a chance on your company.

        So, let's say you have that line of credit, and you get a big order from a new customer, an order that will really help your business grow. It's really tempting to just jump in — but hold on!

        “Don't be attracted by a large contract with a big profit and not look at his credit-worthiness,” Mr. Spoor said.

        There are several avenues to check the credit history of your customers. One is to ask for a financial statement, although Mr. Spoor noted that most small-business owners might not have the time or experience to plow through pages of numbers.

        The best route probably is a credit reporting service, such as Equifax or Dun & Bradstreet, Mr. Spoor said. He also noted that there are merchant and trade associations in some industries that help supply credit information.

        Granting credit will cost you money, but you can — and should — pass that expense along to your customers by building it into your pricing or fee structure.

        One way that it likely will cost you is through discounts that are designed to encourage customers to pay faster. Mr. Spoor said the most common discount is 2 percent if an invoice is paid within 10 days. That might take a bite out of your profits, but having the money in hand will help your cash flow.


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