Elmer McDuffy: Customer Invoice As Credit

If you are a business that provides goods or services, chances are you invoice your customers in order to receive payment. An invoice is simply a bill that sets out the amount to be paid, what is being paid for, and the terms of payment. Although most businesses don’t realize it, by giving customers an invoice, what businesses are really doing is extending credit to their customers.

Invoices are Credit

Most business people tend to view an invoice as simply a request or demand for payment, but by providing the good or service in advance of payment and requesting payment after the fact, what businesses have actually done is extend credit to their customer.

More specifically, the law considers this to be an unsecured loan. Unsecured loans are loans that are not secured by collateral. Suing a customer to recover on an unsecured loan won’t work if the customer simply doesn’t have the money because there’s nothing to recover against.
When extending credit to a new customer, since that is what you are really doing by invoicing them, it pays to check on their credit just like you would for any loan. Business credit checks are more complex than personal credit checks and should consider information such as:

• How much credit is the customer seeking?

• What other businesses does the customer do business on credit with?

• How has the customer fared in difficult economic times?

• What do other businesses say about doing business with the customer?

• What kind of property does the customer own in case the customer goes into bankruptcy?

• Any other relevant financial information

If the account is especially large, consider hiring a professional credit research company that specializes in analyzing business creditworthiness.

Determining a Customer’s Credit Risk

When evaluating a customer’s potential credit risk, there are a lot of factors to take into consideration. One piece of advice is to look at the long term and patterns, not the short term and one or two isolated instances. Another piece of advice is to look at yourself and evaluate how much risk you can afford to take. Here are some of the basic considerations to keep in mind when evaluating a customer’s credit risk.

• Has the customer had a long-term history of paying invoices on time: don’t let isolated instances affect your judgment, businesses regularly have brief periods of financial difficulty such as a one-time cash flow problem. The key is to determine whether the business genuinely tries to pay its bills on time and can be expected to “make good” even if it ends up paying late.

• How big is the customer: how much benefit you expect to get from a customer relationship should influence how much risk you’re willing to take on.

• How much risk can you afford to take: if you are on solid financial ground and can afford to be more aggressive, then you may be more willing to take on a riskier customer.

• How long do you expect the relationship to last: if a customer seems like they might be a life-long customer, then you should consider taking on more risk. On the other hand, if the customer will only be around for a short period of time, then you should be less tolerant to risk posed by a customer’s poor credit.

Creating the Invoice

If you’ve decided that a customer is creditworthy, then it’s time to create the actual invoice. There’s nothing complex about an invoice, but the key to invoicing correctly is to be extremely clear in your description of the products and/or services rendered.

Don’t use general statements about the good or service being provided, make the description detailed and accurate. Clearly state in bolded or offset lettering the time period the customer has to make a payment. Typical payment windows are 30, 60 and 90 days. Make it similarly clear how payment is to be made and to whom. Leave out no detail that a customer can use as an excuse for delay in payment.

Finally, provide contact information for the customer to call if he or she will be unable to make the payment as requested.