Credit Analysis To Promote Successful Debt Collection 1 of 7

By Dean Kaplan+

Proper credit analysis can aid debt collection efforts

Before accepting a new customer, credit departments should always perform an analysis of the potential customer’s credit history.

No one wants to think about future debt collection issues when taking on new customers, but in today’s economy, it would be foolish not to approach credit decisions with some caution. Accounts receivable represent one of a company’s biggest assets. In order to prevent the need for future debt collections, it is up to the credit executive to develop detailed and specific new customer account parameters. This is the first in a seven part series of articles about how to evaluate new customers and determine what if any credit to extend. This article will focus on what preliminary information to request from potential new clients.

When a new customer is landed, and the credit department sets up the account, the credit department must have a specific procedure to follow. Consistency of the data base will make everyone’s jobs a lot easier as the customer relationship moves forward. Ideally, the new account should detail accurate name and address information. Many credit departments assign an account number to each customer. This number may be based upon a DUNS number, social security number, federal tax ID number, or some other numbering system specific to the company. Many credit departments have a predefined system in place for acceptance or denial of credit for new customers. The credit policy can be very helpful because it takes a lot of the subjectivity out of credit decision making.

In most cases, sales personnel are the first to make contact with a new customer. In addition, they are typically the company representatives who make the most ongoing contacts with customers. Therefore, sales personnel often are an excellent conduit for collection of credit information. Not everyone is well-suited to participate in credit or collection activities. However, all sales personnel must be trained to understand the important role they can play in the credit analysis and extension processes.

In some companies, sales personnel will provide new customers with a financial statement form to fill out and return directly to the credit department. Some customers, however, will prefer to give the completed form to the sales person and have him or her turn it into the credit department. It is often possible for sales personnel to look and listen when making sales calls and provide the credit department with important information about the look of the business, the location, competition, management, brands and products being sold, etc. In the best-case scenario, a cooperative attitude between the credit department and sales personnel is the ideal.

Obviously, the best source of information about a new customer is the customer. Whoever makes direct contact with the customer, whether it is sales or credit personnel, will have the opportunity to ask for and hopefully obtain financial data as well as references from banks and other businesses with which the potential customer already does business. How cooperative the potential customer is when providing credit analysis information may signal future customer relations. The more forthcoming the customer is the better.

Clearly, making credit decisions based upon sound customer information will have a positive impact on prevention of future debt collections. Minimizing future debt collection issues is a goal of every credit department. Taking the time to examine new customers before they place their first order will lead to fewer accounts receivable collections down the road. However, if debt collections become a problem, hiring a collection agency can be a good move.

Click here if you are ready to read the next article in this seven part series Credit Analysis To Promote Successful Debt Collection 2 Of 7. This article will focus on what should be included in the credit application.

And be sure to check out the rest of the articles in this series:

  1. Evaluate New Customers
  2. Credit Application Development
  3. Credit References
  4. Financial Statements and Credit Reports
  5. Credit Decision
  6. Purchase Orders
  7. Identifying A Fraudulent Credit Applicant

The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.