Credit Analysis To Promote Successful Debt Collection 3 Of 7

By Dean Kaplan+

Credit applications can help debt collection efforts in the future if they become necessary

Your company should develop a thorough credit application, including credit references, for each potential new client

The more information that is collected during the credit analysis phase of a new customer relationship, the less likely future debt collection issues will arise. Of course, the information collected must be accurate and meaningful to the analysis process. This is the third article in a seven article series about how the credit department should base credit decisions on the results of in-depth credit analysis. This article will focus on credit references.

When a credit department is collecting information for its credit analysis of a potential new customer, one key area is to ask for credit references. Below is a list of information you need to obtain from each credit reference:

a. The name and address of the potential customer you are requesting the credit information about.
b. What is the largest amount of credit extended to the potential new customer?
c. How long has the credit reference been in a business relationship with the potential new customer?
d. How much does the potential new customer currently owe the credit reference?
e. How much, if any, is delinquent?
f. Over time, what has the payment pattern been? On time, past due, etc.
g. What are the payment terms agreed to with the potential new customer?
h. Did the credit reference obtain a personal guarantee or security agreement from the potential new customer?
i. Has the potential new customer remitted any NSF checks for payment?

One thing to remember when checking references for a potential new customer is that the customer will probably not give you references which will reflect poorly on their business. Therefore, it is always a good idea to go beyond the references provided by the customer and check a few references that you come up with on your own. Examples of additional references to check might be other companies within your industry which do business with the potential customer, or other product lines sold by the potential new customer.

It is usually prudent to base credit decisions on facts, not feelings. However, the character of a potential customer is still important. The best way to judge character in the credit decision arena is to look at the reputation of the potential new customer within your industry and to carefully evaluate the references you are able to obtain. These two things will usually give you a good idea of the integrity of the potential new customer.

When you are designing your credit reference form, the simpler and easier it is to complete, the more likely it is that you will receive the reference. If you are asking the person to mail the reference to you, include a self addressed stamped envelope. In today’s high-tech world, an online reference form which can be filled in online and submitted electronically is a plus. The easier you make the process the better the response rate.
If credit references are collected by telephone, be sure to take detailed notes on all topics covered. Take note of the person’s name and title that provided the reference as well as the date of the conversation.

Collection agencies do not typically get involved in the credit department’s credit analysis or decision making processes. However, it is true that the more you know about a potential customer, the better. If it turns out that debt collection becomes a reality with a customer, all the information collected during the credit analysis may prove helpful. Sometimes just being able to find a debtor is difficult, and the contact information in the credit analysis may enable location and possible payment. Accounts receivable collections are important in any company. Collection agencies are experts in debt collections, and they have the resources necessary to locate and collect even from debtors who have disappeared.

Click here if you are ready to go onto the next article in this seven part series Credit Analysis To Promote Successful Debt Collection 4 Of 7. Click here if you missed previous articles Credit Analysis To Promote Successful Debt Collection 1 Of 7.

And be sure to check out the other 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.