Importance of Credit and Collections

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Credit is an important part of many businesses and many households. Businesses use credit, families use credit and even countries use credit. However, for a credit system to function properly, debts owed must be paid. When those debts fall behind, it is necessary to employ tactics to collect on owed debts.

Accounts Receivable

When a company extends credit to an individual or to another company, this is known as “accounts receivable.” Since credit extension is a vital part of just about every business, it’s important to develop ways to make sure you’ve found the safest borrowers possible, minimizing the possibility of having your borrowers default on paying you what they owe you.

Applications

To minimize the risk to your business, you’ll need to eliminate borrowers who might be likely to default on paying you. If you have them fill out credit applications, you’ll be able to verify their credit history and decide whether you want to extend credit. After all, if you extend credit to someone who isn’t creditworthy and they don’t pay you, you’ll have to bear the cost of whatever items they purchased on credit yourself.

Collecting Debts

For your company to succeed, you need to make sure the money that is owed to you is delivered. Sometimes, this means actually having to contact a client and inform them that they are not living up to their obligations. This becomes common when an economy suffers, as many businesses get caught up in the downward cycle and start falling behind in their obligations. It’s important to try to work out an arrangement with the customer that will deliver the most effective results. Keep in mind that the more time you give a borrower to pay back a debt before you try to collect, the more likely it is that you won’t get paid back the money that is owed to you.

Collection Department

To make sure your credit collection department is working at peak efficiency, you might want to examine the entire process from top to bottom. When problems are occurring in an area, such as credit management, it is usually happening because management isn’t aware of those problems and haven’t taken steps to correct them. Identifying and repairing those problem areas results in a more efficient credit management and collection process. For example, making sure the credit department conducts regular training seminars on the way to handle all accounts, to prevent personnel from getting lax about rules in place, is one way to increase efficiency.

References

Photo Credits

  • credit 3d sign image by onlinebewerbung.de from Fotolia.com