Know Your Debtors before Giving Them Credit
- Wednesday, 06 July 2011
In order to set up a positive credit relationship, it is beneficial to set up guidelines that you and your employees use before they allow customers to buy on credit.
1. Obtained and verified all contact information.
2. Reviewed the customer’s credit history from a credit reporting agency
3. Ensure the customer has a good credit history with your company
4. Verify credit references with other companies
5. Know the customer well enough to judge character
6. Understand the forecasts for the customer’s industry
7. Forecast the customer’s financial condition, stressing cash flow.
8. The terms the customer wants are clear
9. Considered the size of the customer’s potential credit
10. Ensure the customer pays some cash up front, such as a deposit at the time of order or delivery.
One thing to keep in mind, don’t set your standards in concrete. Allow employees some flexibility, but do not allow them to deviate away from the guidelines too much or too often, especially when evaluating new customers.
Once you start extending credit, it is a good idea to get an annual update of each customer’s credit history. This will help you identify patterns or increase in potential risks.
The last thing to keep in mind when issuing credit is that you are developing a relationship with a customer. If you accurately assess the credibility before you agree to issue credit, the relationship has a good chance of running smoothly, giving your balance sheet a better chance at staying balanced.