//How do I decide who to offer credit to?

Guide to best practice.

Once you land a new customer, it’s easy to jump straight in and start trading with them without thinking too hard about whether they are a good credit risk or not. However, a sale won is worthless if the customer never pays for your goods or services and you have to write it off as a bad debt.
It really pays to have a robust process in place to assess if a customer is creditworthy and to decide how much credit to extend.

Know who you are trading with.

It’s important to know exactly who you are about to trade with. Some companies are structured as groups that have a legal separation from other parts of the business. It can appear that you are about to trade with a large and healthy company but in reality they may have placed the order from a smaller business in the group that is struggling financially. It’s possible for a group to put a smaller business within the group into administration owing money to suppliers.

The application form that you have should ask for details such as registered name, company number and registered address along with names of some of the directors. Check that you have the correct invoicing address as this may be different to the registered address and mean delays in payment if the invoice is sent to the wrong one.

Financial size of the company.

Try to get a sense of the size of the business by asking for details such as turnover, amount of employees and turnover on your account application form.

If you know the proper legal name and company number you can look up their financial information in order to make a more informed decision.
Companies House offer a free basic search although the information on the reports can be up to two years old.
There are many credit checking services available which offer a more up to date report. Some work on a subscription with an annual fee and some on a pay as you go basis. Most reports will show if there are any CCJs filed against the company, who the directors are, what their turnover is, credit worthiness and how many days beyond terms they pay at.
Common advice is to use your application form to request references from other suppliers so you can ask how long they have traded together, what credit limit they have given and how many days beyond terms if any, they pay to. However a lot of companies will refuse to give references and even if they do they are likely to be their most favourable suppliers thus not giving a true picture.
It’s always important to do your own research thus lessening your risk.

Terms and Conditions.

Always include a copy of your terms and conditions to the application form and make sure that there is a section where the applicant must sign their agreement. This will put you in a stronger position if the customer doesn’t pay as it shows they accepted your terms and conditions of supply. It also makes things much clearer for both parties.

Offering credit to the customer.

Once you have assessed all the information you are in a position to make an informed decision whether to offer credit and at what level.
Dealing with a company and their orders is not always that black and white. Good credit control can make different options available such as asking for full or part payment in advance, splitting orders into smaller consignments so the order doesn’t exceed the credit limit or setting up a payment plan. On larger orders it is always worth insuring your exposure.

As the relationship grows and the trust between you and the customer develops it is always possible to review and increase the credit limit.

How we can help.

Midland Credit Control are an outsourced credit control company who can do all of the above for you which in turn gives you the time to create more business. We are experts at forging and maintaining good relationships with client customers thus ensuring prompt payment whilst keeping the order book full. We routinely monitor all our clients customers and know on a real time basis if there are any impending changes, CCJ’s, changes in credit rating etc enabling our clients to make swift and informed decisions thus keeping their cash flow healthy and lessening their risk exposure.

2017-11-28T18:39:55+00:00

About the Author: