CHAPTER 4: CREDIT MANAGEMENT
Certain industries secure another responsible party or mechanism when working with a customer that does not have a strong enough credit score on its own. These include: Bank Guarantee: This is a commitment by a bank to be answerable for payment to a specified beneficiary (seller) in the event of the failure of the bank’s client (the buyer) to pay. Parent Company Guarantee (B2B): The parent company of the customer guarantees the customer’s payment. Personal Guarantee: With B2B, this requires an officer of the company to secure property with a personal guarantee to pay (typically used in commercial rent con- tracts). In B2C, this may be a relative or a friend of the customer. Promissory Note: A legal document between a lender and a borrower where the borrower promises to repay the loan by a given date. The promissory note also contains information about the terms and conditions of the loan (see Chapter 6: Collections). Secured Transaction (lien): There are two types. The seller holds the title until all payments have been made when purchasing real property (i.e., land, buildings, equipment, automobiles, trucks, boats). Or, when a customer has not paid their invoices and has a substantial balance, a lien can be applied after the fact. NET TERMS Setting net terms offers a good opportunity to incentivize customers to move to best practices. If a customer can only pay via paper check, give them shorter terms because it takes longer to process the paper. for any customer that pays electronically, set longer terms, because electronic payment reduces cost for both the sender and receiver. (Remember that when extending credit terms, the company is loaning customers its cash. Example offerings: 2% 10 net 15 —This means the customer may take a discount of two percent if paying in 10 days, otherwise the full amount is due in 15 days. Offer for paper invoice and paper check. The shorter terms are to account for mail float, manual processing time, and bank float (private banks). 2% 10 net 30 —This means the customer may take a discount of two percent if paying in 10 days, otherwise the full amount is due in 30 days. Offer for electronic invoice (EDI or web- based e-invoicing) with electronic funds transfer (EFT). Offer longer terms to provide an incentive to customers to sign up for EFT, which gets the cash in the bank faster.
If receiving paper checks, you need to determine where they will be mailed. Checks may be mailed to:
The company directly, for cash application to the account, then sent to the bank (this is less desirable). A bank lockbox. The bank will deposit funds in the bank account and may also have the ability to apply the cash to the customer’s account or send check information and images to the company for cash application (preferred, as it reduces mail float and the money is in the bank). Lockboxes that are strategically located in order to reduce mail float. An outsourcer. A factor.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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