To develop a sound customer profile to help in decision making
THE FOUNDATION OF SOUND CREDIT DECISIONS
Assessing a customer's credit risk - the likelihood of paying bills when due - is as much art as science. Whether you can extend credit is for you to decide based on cash flow needs and other factors. If the question is: Should you sell on credit to a particular customer? The answer is - it depends. Developing a customer profile that includes comprehensive, accurate information is key. Here's what to include:
Company Basics
What is the company's legal name and form? What line of business is it in? How long has it been operating? Do sales fluctuate by season? Is it a subsidiary of another company that might provide a guarantee? Where does the company stand vis-à-vis its competitors?
Management Team
Is the company managed by experienced professionals? What background and skills do they have? How long has the current team been at the helm?
Credit Rating
When it comes to a customer's payment habits, past behavior is usually an indicator of what you can expect if you extend credit. Credit agencies publish ratings based on whether a company pays on a timely basis and its default tendencies.
Legal Problems
Is the company involved in any pending litigation? Have there been any prior judgments against the company? Has it ever declared bankruptcy? A history of legal problems might be a red flag that warrants scrutiny.
Economic Conditions
Your customer might run a tight ship, but some things are simply outside its control. Local or national, even global, economic conditions may be having a temporary effect on a company's ability to pay. Maybe the whole industry is in a slump. If you feel comfortable making a decision that your customer will pull through, go ahead and extend credit or negotiate new terms on existing debt. Chances are you'll be rewarded with the customer's loyalty.
There are numerous resources at your disposal for gathering information to develop customer profiles. Start with a reputable publisher of credit information. With the customer's permission, you might also consider getting references from the customer's bank. Also speak informally with people in the industry and ask if they are aware of any issues you should know about. If you are considering extending a large amount of credit to a particular customer, it might be a good idea to visit the company in person for a first-hand look.
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