There are two ways to mismanage credit in small business:
- Granting credit without wise credit policies
- Using credit with no plan of how to pay the bill
Both have a huge impact on your cash flow and are often closely related. Here are scenarios to demonstrate these points.
Granting Credit without Wise Credit Policies
You have two opportunities: You can work on a big project for a corporate client or you can take on several small clients. You might think the big client is the way to go, but how long will it take you to get paid? Often, large companies take their time paying — sometimes 60 to 90 days, sometimes longer. You may find that you’ve tied up a tremendous amount of your time with no cash flow to pay your bills. The smaller clients could provide you with more immediate cash flow without tying up all your time.
Using Credit with No Plan of How to Pay the Bill
It’s easy when times get tough to pull out your credit card to cover your current expenses. But doing this with no plan of how you’ll pay the bill gets many small business owners in hot water fast.
To eliminate these difficulties, consider how you want to manage your credit and create credit policies. Answer these questions:
- Do you need to extend credit at all?
- Can you get paid at the time of delivery?
- Can you get customers to pay by credit card?
- Can you ask for a deposit up front?
- Who will you extend credit to and what criteria will you use?
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