Know Debtors Before They Say, ‘Charge It’

Posted on Wednesday, July 04, 2018

If your company routinely extends credit, you're in the business of lending.

That means you need to become an expert at judging credit relationships before shipping the goods or  performing the services.

Bankers have a saying: "We never made a bad loan." What they mean is that every loan is good — until the first payment is due. 

Even if all of your customers paid on delivery, there are still risks. You're lending time, cash, equipment, personnel and resources until that delivery is made and the full payment is in your hands.

The first step in issuing credit should be to set up consistent guidelines that your staff members can use before agreeing to let customers "charge it."

Here are ten levels of investigation to follow when deciding whether to offer credit to someone. You may not need to include all of them in your policy, but remember: The deeper you search, the lower the risks.

Level

1

Your company obtained and verified all contact information.

2

You reviewed the customer's credit history from a credit reporting agency.

3

The customer has a good credit history with your company.

4

You verified credit references with other companies.

5

You know the customer well enough to judge character.

6

You understand the forecasts for the customer's industry.

7

You can forecast the customer's financial condition, stressing cash flow.

8

The terms the customer wants are clear.

9

You considered the size of the customer's potential credit.

10

The customer paid some cash up front. For example, you collected a deposit or retainer on initial orders or service requests.

Once you set standards, they shouldn't be carved in marble, but you don't want to stray too far or too often from them — particularly with new, unproven customers.

After your business extends credit, get an annual update of each customers' credit history. It helps point out patterns or increases in potential risk.

Issuing credit means you're developing a relationship with a customer. If you accurately gauge credit soundness before agreeing to a deal, the relationship has a good chance of running smoothly — and your balance sheet has a better chance of staying balanced.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.