You might as well acknowledge to yourself up front that if you extend credit, you're going to have customers who won't pay you on time or even pay you at all. It's unavoidable. No matter how keen your judgment of other people is, you can't always identify the deadbeats. And, of course, not all of the customers who don't pay you on time are deadbeats. Some may be unable to pay you for any number of reasons beyond their control, such as a family emergency or an unexpected downturn in their industry.
The only foolproof way to avoid bad debts is not to offer any credit. Since that isn't practical for most businesses, you'll have to do the next best thing, which is to take all reasonable precautions to protect yourself and to ensure that you're not extending credit to the wrong person or business.
Taking precautions to help you reduce the chances that you'll extend credit to someone who doesn't pay his bills is an extremely important step for a small business owner. One bad debt can strain your cash flow or, in extreme cases, put you out of business. Just don't forget that the decision to extend credit to customers does not mean that you have to extend credit to every customer.
The precautions you take will depend upon whether the customer is an individual or a business. Essentially, you want to gather enough credit information on your customers to give you a good idea whether they are a good credit risk. Also, the information you'll want to gather will be different for different types of businesses. For example, if you operate a mail order business, you may need to take steps other businesses don't have to take to make sure that the credit card is legitimate because you can't see your customer or the card they're using.
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