This is the second in our series, “Establishing Best Practices for Extending Credit in Today’s Economy”.
According to a 2008 survey conducted by GfK Roper Public Affairs and Media, when faced with a medical expense over $1,000, one out of 10 people surveyed stated that they would seek a payment plan/monthly payments from the service provider to help in paying the expense. This was before the impact of the credit crisis was really felt by the general population.
Today, one can assume, if asked the same question again, that a higher percentage of people would seek payment assistance in the form of a payment plan. If your business recognizes the need to extend credit terms to your customers, you probably also realize that it would be a good idea to have a plan in order to execute successfully and avoid unnecessary repayment risk.
There are several areas to consider when getting organized to extend credit. In this blog post, we will highlight “best practices” to assist you in successfully extending credit to your customers.
Develop a Written Plan
A plan defines the goal behind offering credit terms, a roadmap for everyone to follow in executing the plan, as well as the metrics to measure its success. Putting it down on paper forces you to really think about what is involved, offers you the ability to get valuable feedback before implementing, and the ability to share it with everyone on your team. This ensure that it is properly executed.
Understand Lending and Privacy Compliance Requirements
Extending credit terms is lending and is, therefore, subject to a number of state and federal consumer lending and privacy laws and regulations. It is a best practice to seek out professional advice to understand your role and obligation regarding these laws and regulations. Topics to cover include collecting and handling personal information from applicants, making credit decisions, using a credit agreement, collecting payments, handling missed payments, and use of outside collections services.
There is a lifecycle to extending credit with many steps along the way. Minimizing risk associated with compliance, while at the same time ensuring a positive experience for your customers, requires some planning across the entire lifecycle. Automation across the entire lifecycle can greatly simplify compliance and dramatically reduce the overall risks involved extending credit successfully.
Formalize Credit Processes
Formalizing the various processes involved in extending credit aids in compliance, ensures that credit criteria are applied consistently for all applicants, and creates written documentation needed to process and enforce the credit agreement with the borrower. Specific areas to consider include the application process, the credit application and credit agreement forms, borrower communications, document retention and record storage polices, credit evaluation and approval, missed payment policies, and default resolution. Automation and written guidelines for staff to follow are best practices to achieve these objectives.
Effective Automation is the Key
When you hear or read stories about businesses that have had negative experiences with extending credit to their customers, it is often because they weren’t organized and didn’t apply best practices to the overall process. Unfortunately, even in cases where good procedures and policies are defined, execution using manual processes often proves time-consuming and error-prone. When staff turnover is factored into the equation consistently, applying best practices to extending credit becomes more difficult.
Effective automation of the ENTIRE lifecycle is the key to success. Supported by written policies and procedures it greatly reduces risk by simplifying compliance, enforcing best practices, eliminating manual processes, enforcing consistency, and providing business intelligence at every stage of the lifecycle and across all credit accounts. Effective automation makes it possible for even small businesses with limited staff to be highly successful extending credit to their customers.
In our next blog post for “Establishing Best Practices for Extending Credit in Today’s Economy,” we will explore best practices for creating new payment plans in more detail.