As a furniture manufacturer, offering furniture credit to your customers is a necessity. Retailers who want to sell your products are not always going to have the cash on hand to purchase inventory, so establishing credit terms can help all parties.
Of course, this only works out when you make good credit decisions. If you fall into a pattern of making dumb credit decisions, the outcome can be disastrous. Let’s take some time in this article to discuss how you can sidestep these mistakes and stay on track for a healthy bottom line.
#1 – Establish Firm Criteria
One of the easiest ways to get into trouble with B2B credit is to take each decision on a case by case basis. You don’t want to base your decisions on simply having a conversation with the owner of the retailer to decide if he or she is worthy of your trust. Everyone has the best intentions, but that doesn’t mean they’ll be able to make good on their account in the end.
Instead, establish credit criteria that you can apply across the board. This takes the guesswork out of the process and removes some of the human element. You can base your decisions on a variety of metrics, including business credit scores, time in business, references from other creditors, etc. Sure, some of your accounts will still wind up in collections at the end, but your success rate will be far better if you have a framework in place.
#2 – Adjust Furniture Credit Proactively
Once you have extended credit to a business, keep track of that account regularly to make sure it is healthy. If you notice payments are lagging or there are other issues coming up, consider adjusting their available credit down to reduce your risk. You can always open up more credit for that customer in the future if they get back on track with payments and are in a strong position.
#3 – Start Modestly
For a new customer who is only marginally qualified based on your furniture credit criteria, start with a modest limit and offer to move that limit up as they prove their reliability. It’s best to be open about this arrangement right from the start so the customer knows what to expect and understands how they can access more credit in the future.
This is a particularly good strategy for new businesses without a track record in the industry. It can be hard to assess creditworthiness for a company that has only been open for a short time. Instead of exposing yourself to major risk on this account, hedge your bets and offer a portion of what they’ve asked for initially.
#4 – Keep an Eye on Your Terms
When thinking about bad credit decisions, you probably think first about avoid accounts that will never pay you back. And, to be sure, that’s the biggest risk associated with offering credit.
With that said, it’s also important to manage the terms that you offer your credit customers. Some of your customers will likely ask for extended terms after they have been with you for a while, and you might feel compelled to agree as a show of good faith. Extending terms out to 90- or even 120-days might be okay in some cases, but don’t forget to consider cash flow. If you keep moving terms farther into the future, you’ll soon find yourself struggling to pay your own bills – even if your credit accounts aren’t delinquent.
#5 – Keep the Big Picture in Mind
No one likes to write off bad debt. If a credit account stops paying, you’ll wind up taking a hit on that account, even if some of the debt is collected eventually. The importance of making smart credit decisions is obvious from an accounting perspective.
But you are operating a business in the real world, and the reality of every market is messy. To thrive over the long run, you need strong relationships with many different retailers. And, at the moment, some of those retailers may not have the best case for opening a big credit account, but they are still worthy of your attention. Working together with retailers to bring down your exposure while still offering credit is an important, albeit difficult, balance to strike.
Properly managing the credit you extend to retailers is not about never writing off a single dollar of bad debt. In fact, if your policy is strict enough to eliminate all bad debt, you are almost certainly leaving money on the table by turning away good accounts. For a healthy credit department, you’ll want to establish solid lending criteria, work closely with your accounts, and track their performance to make necessary adjustments to credit limits and payment terms. Good luck!
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