Before you extend credit to a customer, make sure you’ve established a competitive and practical credit policy. First, consider two components:

1) Your terms and conditions
2) Your collection policy

Terms & Conditions
When deciding on your terms and conditions, consider the length of time you’ll extend credit and whether or not you’ll offer a discount for early payment.

Length of Credit Period
You can establish the length of your credit period by learning your competitor’s terms. If you ask to be paid in 30 days in an industry that has a 45 day standard, you could lose sales.

You may try to increase sales by extending credit more liberally, while being aware of cash flow issues due to longer collection times and possible bad debt expense.

Discount Policy
Especially if it’s common in your industry, you may offer a discount policy that persuades customers to pay their accounts sooner. Consider your own needs for cash, industry expectations, customer goodwill and your own borrowing costs, when deciding on a discount.

A standard term is, “2/10 net 30”, meaning a 2% discount is given to customers who pay within 10 days. If they don’t pay within 10 this time, then full payment is due within 30 days. When deciding on your own terms, consider how credit affects your cash conversion cycle.

To illustrate how a discount may affect you Accounts Receivable, let’s look at a scenario of a customer who owes you $5,000, assuming your own cost of borrowing is 10%.

Not taking into account industry practice or customer goodwill that you may earn in giving a discount, your business earns $72.60 more by not offering this type of discount. However, this may be fully or partially offset by the opportunity cost of receiving funds 20 days sooner.

If you are thinking about offering this type of discount, you may want to discuss a cost-benefit analysis with your accountant or business banker.
...you may want to get a cost-benefit analysis from your accountant or business banker.
...you may want to work up a cost/benefit analysis with your accountant or business banker.

Creating a healthy credit policy for your small business means balancing your industry’s standards, your own cost of borrowing, and the loyalty you may gain from customers when you offer discounts for early payment.

Working for yourself can bring many rewards, but it also comes with many challenges. Take a look at the questions below. They can help you decide if the entrepreneurial route is right for you.

Are you willing to take risks? Going into business for yourself means giving up many benefits (such as health and dental) available to employees. It may also mean going without a regular salary, especially in the early years.

Are you willing to work long hours? If you enjoy the 9-5 lifestyle and taking annual vacations, then starting a business may not be right for you.

Have you done your market research? Do you know who your potential customers are? Are you convinced they will buy your product or service? Is someone already doing what you’re doing? What makes your product or service unique? Take the time to research the market before starting your business.

Are you willing to market your product/service? You may have a great product, but if you’re not prepared to market it and yourself, you should think twice about whether business is right for you.

Have you determined your start-up costs? Thanks to communications technologies, many businesses can be started without much cash. But you still need to budget for things like computers, Web-hosting services, and supplies.

Are you willing to learn? Combining your passion and your business is the dream of many budding entrepreneurs. But be prepared to learn all about the nuts and bolts of business as well — things like finance, operations, accounts, and customer service.

Do you have what it takes to lead? If your business becomes successful, you may need to hire employees. Do you enjoy giving direction to people? Can you bring out the best in them?