The 5 Cs and B2B Lending
Anytime you work for a company or ship a product before getting paid, you are extending credit to that company. That’s why, just like any lender, before you begin working with a new client or company you should review the 5 Cs of Credit.
For individuals applying for a loan, “character” generally refers to their credit rating. After all, most banks don’t care if you’re a nice guy, as long as you pay your bills on time. Knowing your new client’s credit rating is also important for you as a business owner, but so too is the character of the business. Are they known for having good business practices? Do they treat their employees well? Do they have a history of customer complaints? These kinds of issues can not only hurt their company, but if they owe you money, they can hurt you as well. Depending on how bad a company’s reputation is, being in business with them can also hurt your reputation. Checking with the Better Business Bureau, as well as with local organizations, companies like Glassdoor and any contacts you have in their industry can help you assess this C. Our Business Credit Report Survey can help you see the kinds of information different credit reports provide.
Capacity refers to the borrower’s ability to repay a loan. You’ll check capacity by requesting a credit report on a new client, but you can also look beyond the credit report. Have you heard that this company recently leased new office space? Did they bring on a lot of new hires? If you have questions about their capacity, ask them. Our Credit Application Handbook can help you create a credit application that reduces concerns about payment.
In the case of a house loan, the capital would be the down payment. If you are extending a credit limit to a new customer, consider getting a down payment or retainer or perhaps make the first shipment COD and then slowly extend credit.
As a business performing a service or selling a product you are unlikely to demand collateral from a new client. In the case of a B2B credit application, a personal guaranty may take the place of collateral.
Conditions can refer to how a borrower intends to use the money, but in terms of extending credit to a client, conditions refers to the conditions of the “loan” or contract itself. Make sure your contract includes terms for repayment, interest on late payments, acceleration clauses and other items that can protect creditors in the event your customer defaults. Our Terms and Conditions Handbook can help you create a contract that reduces the chances of unpaid invoices.
The best way to avoid debt collection issues is to only extend credit to a business that can and will pay you. Paying attention to the 5 Cs can help you make those decisions wisely. However, if you do find yourself with an invoice that’s hard to collect, let us know, we’re here to help.
About The Author:
Dean Kaplan is Principal at The Kaplan Group. Dean's expertise is widely recognized in the debt collection industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.