Eight Steps to Getting Paid

Many businesses offer credit to encourage people to buy. Sometimes using credit as a sales tool can be risky: customers don't always pay on time. BMO Bank of Montreal has developed eight risk-minimizing steps to assist you in managing your trade credit.

• Understand standard credit practices in your industry
• Know your legal rights
• Decide to extend credit
• Develop a credit policy
• Assess your customer's ability to pay
• Track accounts and recognize warning signals
• Develop a collection plan
• Minimize bad debts

Understand standard credit practices in your industry

Before you decide to extend credit you will need to know what happens in your industry. Find out how your competitors extend credit: This will identify the standard practices in your industry.

Here's a list of possible resources:

Trade associations
• Competitor advertising
• Bankers, accountants, or other relevant professionals

There are several ways to extend credit:

Cheques
• Credit cards
• Letters of credit
• Payment terms

Tips:

Cheques

Always ask for identification
• Consider using a cheque verification service
• If appropriate, ask for a certified cheque

Credit Cards

Always follow merchant contract conditions
• Obtain authorization as required
• Check signature and expiry date: remember, unsigned cards are invalid

Payment Terms

Ask for a down payment
• Keep in touch with your customer
• Act quickly if payment is overdue

Letters of Credit

Ask for a down payment
• Beneficiary must comply precisely with terms
• Seek professional bank services

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Know your legal rights

The Bankruptcy and Insolvency Act and amendments can be purchased from federal government bookstores or obtained by mail.

The Consumer Protection Act, a provincial act protecting consumers, is available through provincial government offices listed in Appendix A. Legislation governing what a collector can and can't do is provincial. The Collection Agencies Act defines procedural restrictions.

Best Practices

Experts suggest that to minimize your risk you should adopt the following practices:

Become familiar with what is legal and common practice in your industry.
• Know the legislation that protects your rights.
• Extend credit wisely by thoroughly assessing the degree of risk.
• Be aware of what is happening in your customer's business.

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Decide to extend credit

You have now done your research concerning the practices and regulations regarding trade credit within your industry. It is now time to consider your readiness to extend credit. How will you manage your credit to minimize your risk?

Here are some things to consider:

C ash Flow	Do you have the necessary cash flow?
R eceivables	Do you have a system?
E valuation	How do you assess your customer's ability to pay?
D ebt	How do you collect overdue accounts?
I ncome	Does your price reflect the price of granting credit?
T erms	What terms are normal for your industry?

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Develop a credit policy

You will need to develop a credit policy that reflects the standards in your industry and addresses the particular needs of your operation.

Here are some things to consider:

What is the total amount of credit your company can afford to extend?
• What length of time will you allow for payment?
• What penalties will apply to late payments?
• Will you offer discounts for early payments?
• Do you have an application for credit?
• Who will act as the contact within your company? Within your customer's company?
• Have you outlined staff responsibilities concerning credit?
• Do you have a data sheet for each customer?
• What is the maximum credit limit you will extend per customer?

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Assess your customer's ability to pay

You have a credit policy. How will you assess your customer's credit worthiness?

Here are three important resources to use when making credit decisions:

Credit Application Forms

Credit application forms, at a minimum, should contain this information:

Length of time the customer has been in business
• Appropriate contact people and how to reach them
• Banking information
• Two or three trade references

Your Bank

Banks are good sources of this specific and general credit information:

Banker's reports offer general client banking information, which may be accessed with the written permission of the client
• Outline of good credit practices

Credit Bureaus

A credit bureau is a commercial organization that supplies reports on credit history. Customer consent is required to access this information:

Individual credit history and rating
• Company credit history and rating

Tip: As a minimum, be sure you can answer the following questions about your customer's credit worthiness:

How long has your customer been in business?
• Are there any outstanding legal actions against the company?
• Does your customer have a good credit record?

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Track accounts and recognize warning signals

You have prepared a credit policy that suits the needs of your company. You have assessed your customer's credit worthiness, and you have made the decision to extend credit. How will you monitor the account? Can you recognize the signs of a customer's deteriorating credit worthiness?

Aging receivables is a commonly used term in the banking industry. It means that your receivable, that is the amount of money you are owed by a customer, is overdue. It is a known fact that the older a receivable is, the mless chance you have of collecting it.

Is your customer still credit worthy? These are warning signs:

Unsatisfactory report from a credit bureau
• You are receiving only partial payment
• Your customer has dramatically changed the ordering pattern
• Your customer keeps telling you the cheque is in the mail
• Your customer frequently requests changes in the payment schedule
• Your customer has stopped buying from you
• The customer claims dissatisfaction with the product
• Your customer cannot be reached

Best Practices

Here are expert suggestions for your accounts receivable policy:

Have a tracking system
• Have specific procedures and follow the procedures consistently and faithfully
• Take prompt action when warning signs appear
• Treat all overdue accounts seriously
• Have a procedure in place for collecting overdue accounts.

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Develop a collection plan

Once you have developed a tracking system to alert you to aging receivables, you will need to consider how you will handle them. How will you collect?

Before you take action to collect an overdue account, it is important to find out about your customers situation. There may be specific circumstances causing a delay in payment. If you are satisfied that this is not the case, there are four stages to collecting the overdue account that you may wish to follow:
A. The Polite Reminder (5 days past due) Assume the customer has overlooked the bill.

Try... "We have not yet received your payment for $2000. Will you please check on this? Thank-you."

B. The Discussion (15 days past due) Assume the customer is aware of the bill but can't or won't pay.

Try... "Your payment is overdue. Is there a problem?" If so, what can we do? As you are aware , we cannot provide further product or service until this account is cleared up. When can we expect a payment?"

C. The Firm Demand ( 45 days past due ) Assume the customer can't or won't pay because there is a serious problem.

Try... "Your account is seriously overdue. You have not responded to our previous requests for payment. This is our final reminder. If we do not receive payment within seven days, we will take further action."

D. The Hard Push (60 days past due) Assume you have lost your customer: you want to recover what you can.

Try... "Since you have not responded to our repeated requests for payment, we have referred this account to our lawyer." (You may want to refer to small claims court or a collection agency, rather than a lawyer.)"

Best Practices
Experts agree that these are good practices to follow when collecting bad debts:

Have a collection policy and follow it.
• Always be polite and respectful, but firm.
• Avoid arguing with customers.
• Never propose an action that you won't carry out.
• Try to understand your customer's situation, and work things through together.
• Mediate when appropriate.
• Use the legal process as a last resort.

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Develop a collection plan

Minimizing bad debts is a key part of accounts receivable management.

Here are some ways to protect yourself:

When you accept a cheque, insist on getting two pieces of identification.
• Join a credit bureau.
• Keep track of your customer's credit history.
• Ask your customer to fill out an application for credit.
• Be prepared to deny credit if the risk is too high.
• Pay attention to warning signs.
• For foreign accounts, it is preferable to use letters of credit.
• If your customer is paying in installments, ask for some money up front.
• Make credit conditions clear on contracts and invoices.

General Best Credit Practices:

Have a cash flow to justify extending credit
• Understand the consequences of not granting credit
• Never lend more than you can afford to lose
• Keep the credit histories of your customers up to date
• Know your customer's business cycles and practices
• Have a procedure in place to assess ongoing credit worthiness
• Revise policy and credit limits at regular intervals
• Define responsibilities of individuals who monitor the policy
• Mediate when appropriate

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