Credit Options

April 13, 2006

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When we picture extending credit to a customer, we typically think of the situation where the customer receives a bill in the mail after receiving the goods or services. But credit comes in all sorts of guises. In fact, any time you don't collect full payment from your customer in cash up front, you've extended credit.

If you give your accountant a check when you pick up your income tax return, your accountant has extended credit to you because the work was finished before you paid for it.

Here's a look at the types of credit available to you, in ascending order of risk.

Credit cards. If you decide to accept credit cards, you'll first have to decide which ones you want to accept: Visa, MasterCard, Discover, American Express, or any of the others. The charge you'll pay to the credit card company will vary, depending upon the volume of your sales and the size of your transactions. The average fee usually runs between 2.5 percent and 5.5 percent of your credit card sales, although American Express runs a bit higher. Accepting credit cards is the least risky of the credit options because most of the risk is on the credit card company. For more, see accepting credit cards.

Checks. Although checks are usually considered to be cash rather than credit, they've been included here because they do involve risk on your part. So even if you accept a check at the time the goods or services are delivered, you've extended credit because you're bearing the risk that the check will bounce. If you accept checks, you'll have to decide which types of checks you'll accept (for example, will you accept multi-party checks?), and you'll have to decide which types of identification you'll require. For more on the precautions you should take when accepting checks, see credit information on individuals.

Credit terms. In some cases, you may want to offer credit terms to your customers. Most often that will occur if you sell your goods and services to other businesses, but sometimes you'll want to extend terms to individual customers (just as your credit card company does to you). This is the riskiest option because you're forced to rely completely on the creditworthiness of your customers.

In most cases when you extend credit terms to your customers, you'll want to have them sign a sales contract, so you'll have to decide what the credit terms will be in the contract. You have any number of choices, such as COD, net 30 days, net 10 days, etc. To be binding, the credit terms must be in writing and the document must be signed by the customer.

In many situations, the credit terms will not be formal and don't need to be in writing. The example above, involving the accountant, is one such situation.