As a business owner, you know how your Accounts Receivable impacts your bottom line.

Not every industry is the same but traditional estimates suggest that for every dollar you have as a “non-performing” asset, you’d need to bring in three dollars in new sales to offset its effect. Given that economic times are tough right now, it’s possible that your sales efforts may not be generating the results they used to. Between that and a tight credit market you may find it tough to expand your business or even stay afloat.

It’s often said, “A loan well made is 90% collected”. Success in A/R starts with a solid credit extension policy. Follow these 4 steps as a foundation:

1. REQUIRE a Credit Application: As you know, credit applications are used to help determine the credit worthiness of the applicant.

2. VERIFY through processing: For a Credit App to be useful, the information must be verified. Through processing you’ll want to confirm the corporate identity, contact vendors and request references. You may even consider pulling a credit report on the principals of the company. If you can’t verify any point on the credit app, discuss it with your potential customer. If he’s not willing to wait while you process the application, this may be a red flag.

3. EVALUATE the credit: If the results of processing lead you to extend credit, we advise keeping the terms short initially. As your client builds a payment history with you, you can lengthen the terms. If you are feeling uncertain of extending terms to your potential customer but you still want to do business, consider requesting a ‘personal guarantee’. It will obligate the individual as well as the company for repayment of the debt. If your potential customer is unwilling to personally guarantee the account in exchange for credit, you may want to reconsider doing business with them.

4. REQUIRE down payments: This is a great way to secure yourself when extending terms. If you can get enough money up front to cover any costs or capital outlay, you will minimize the damage done should the account go bad. Determine what your cost is and then try to secure at least that much as a down payment. This way, your customer has vested interest and is more likely to follow through with payment-in-full.

Follow these steps for a solid credit extension policy.