Small Business

The Question of Credit


By Karen E. Klein Q: I sell school uniforms wholesale over the Internet. Where can I get information on obtaining credit for my clients? As a new business, I don't want to extend credit on my own. -- A.C., Amite, Los Angeles

A: Managing your receivables includes intelligent managing of customer credit. Extending credit to a high-risk customer could result in slow payment -- or worse, no payment at all. Yet, by not offering credit or credit-card purchasing to your customers, you may be crimping overall sales and limiting the size of orders. How you decide to manage your credit depends largely upon the kind of business and your target customers.

GETTING TO KNOW YOU. If you are selling school uniforms to individuals, and their purchases would be less than $200 each, what you need to do is set up a merchant account so you can take payments by MasterCard and VISA, says Gene Fairbrother, president of MBA Consulting in Coppell, Tex. "For orders this small, I don't know of any place that is going to do credit extension for you," he says. Typically, finding a source of long-term credit is the task of the buyer, not the seller, Fairbrother explains. "An exception is when there is a high-ticket order involved, like a vehicle, or when you are making a lot of sales in a local area." A large furniture store might extend company credit to its customers, for instance.

If you are selling uniforms to retail distribution outlets, like local stores that resell them to the end user, you will likely need to get your business into some sort of credit position, Fairbrother says, as this is the general way retailers work. "This does not mean that you will have to carry the full credit load," he explains. "You should always get a good portion of the money upon the order and then ask for a COD for a time, until a new buyer has a credit history with you. At that point, it is common to offer terms -- such as 30 or 45 days -- for the balance of the amount due."

If you want to seek out credit companies, talk to your bank and local commercial lending establishments to determine if there are any financing companies that would be interested in working with you and your client base, advises Jonathan Goldhill, principal of consulting firm Jonathan Goldhill & Assoc. in Woodland Hills, Calif. "Getting help from an outside service firm can help you make intelligent and timely credit decisions. I would ask around for a company that will represent themselves as the 'credit manager' or 'credit department' of your company," he says.

YOUR CALL. A credit application completed by your potential customer and submitted by fax or e-mail is all the credit firm will need to get started. With that information, they can acquire references from the customer's banks and creditors. Occasionally, for large transactions, they may request that the customer submit current financial statements, Goldhill says. The credit firm does an analysis of a customer's credit-worthiness using tools provided by firms such as Dun & Bradstreet, Experian, and Equifax. "The reports provided by these organizations, along with the completed credit application, will enable them to furnish you with a comprehensive credit profile of your potential customer. Based on the information compiled, they will make a recommendation as to whether or not the customer is credit-worthy. The final decision to extend credit will be made by you," he says.

If you choose to outsource your credit department, you should periodically request from them reports on all credit applications received, ratio of approval vs. denial recommendations, and average turn-around time. Quicken's Web site has additional information on this topic.

Have a question about your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.


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