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Small Business Credit Caveats

Simple Alliance, Kenya Limited


Extending Credit

While doing business, it is almost impossible to avoid extending credit to business partners, especially to loyal customers. You could allow your debtors to settle their accounts in a month, 2 months, or, basically, within a mutually agreed time period of whatever length. This form of business transaction constitutes an unsecured loan arrangement.      

Unsecured Loan

Unlike the secured loan by which the borrower cites some valuable asset as collateral, you give out the unsecured loan without receiving any form of collateral. Usually, in the event that the borrower is unable or unwilling to pay their dues, the collateral asset is used to compensate you, the loan giver.       

The Risks

Without collateral, the unsecured loan puts you in a risk of making a loss in case the debtor does not pay up. In the legal sense, you cannot sue a defaulting debtor if they did not place a collateral item when acquiring the loan. Extending credit is clearly a sure way by which you could run into losses through bad credit situations.         

Recommended Mitigation Measures

As a small business person, you would not wish to incur losses arising from defaulting debtors. This fact would prompt you to exercise due caution when extending credit to your customers. You need to employ caution when making small business credit decisions. Some suggested measures you could implement include:

  • Looking up new customers’ credit histories from credit reference bureaus
  • Accepting debit or credit card payments
  • Evaluating customer’s credit risks
  • Having customers fill up credit reference forms

Researching New Customers’ Credit Histories  

When contemplating extending credit to new customers, you need to be careful. It is very likely that you cannot vouch for such customers with regard to their business integrity.  You do not wish to extend a loan to a chronic defaulter. In such a case, contact credit reference bureaus for advice about the customer’s credit history.     

Allowing for Credit or Debit Card Payments

When you are paid via credit or debit cards, you are assured of receiving the cash. Despite the slight delay, the risk of customer defaulting is significantly minimised as the debit or Credit Card Company shoulders the responsibility for remitting the cash. With credit or debit cards, you are shielded from the hassle of rushing after non-paying customers.

Asking Would-Be Debtors to Fill Out Credit Reference Forms

As a precautionary tactic, you could require customers who are seeking credit facilities to fill in credit reference forms. This form gives you crucial information that could be helpful in case payment becomes a problem. Major elements of a credit reference form include:

  • The proprietor or manager of the business
  • The amount of credit the debtor is seeking
  • The reference person to get in touch with in case problems arise

Assessing Would-Be Debtors’ Credit Risks

After acquiring the necessary information through credit reference bureaus or from customers’ own accounts, get into the business of assessing the credit risks of the prospective debtor. Check whether the customer has a history of not repaying their debts.  Be cautious not to wrongly rank a genuinely straightforward customer as a habitual defaulter. Weed out any customer who proves to be a routine defaulter.

You are in business so as to make sales and garner profits. The last thing you expect is to be forced to run after runaway bad debtors by hiring debt collectors. Such collection of debts would force you to incur added expenses. To avoid these scenarios, you need to carefully vet credit customers so as to determine their suitability and risks. A look at your clients’ credit history will offer you useful insights. To avoid bad credit scenarios, you could employ the services of credit reference bureaus before advancing credit. The information obtained from these credit research sources would enable you to make informed small business credit decisions. While extending credit, you could be flexible to the extent of accepting credit card payments. These measures shield you from ugly credit and bad debtor situations.

Copyright (C) 2016, Simple Alliance Kenya Limited

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