Credit Analysis To Promote Successful Debt Collection 5 Of 7
By Dean Kaplan+
All credit decisions made by a credit department can lead to future debt collection challenges. The key is to put enough time and energy into the credit analysis to minimize the potential for future delinquent accounts receivable. This is the fifth of a seven part series of articles about things the credit department can do to evaluate the credit worthiness of potential new customers. This article will focus on determining and communicating the credit decision to a new customer.
Every company involved in extending credit to customers needs to have a clearly defined credit strategy for the credit department to follow. In most cases, this strategy will be the credit policy which provides the basis for consistent credit decisions. Credit limits are necessary because they limit the company’s potential for loss. Each customer must be evaluated because circumstances are so unique to each customer’s business situation. No two customers are alike due to product, distribution, and market differences.
When making a credit decision for a new customer, the potential ongoing relationship must be evaluated. If the customer is a one-time sale customer, credit should not usually be extended. Instead, less desirable terms such as cash on delivery or cash in advance are appropriate. Customers who plan to buy now and increasingly into the future must supply the credit department with all requested information so that they can establish adequate credit with your company to support the long-term relationship.
When conducting the credit analysis of a potential new customer, the evaluative process can not be so long that the customer ends up going elsewhere. In addition, the cost of conducting the credit analysis must be worth it given the potential sales of the new customer. Calling references, requesting credit reports, etc. cost money. If the potential new sales from the customer are very small, it may not be worthwhile to go forward with the credit analysis or the customer.
Many factors can affect the credit decision. If demand exceeds supply at your company, then extend credit only to the lowest risk customers. If your company has a large stock of inventory, credit terms may be more lenient in an effort to clear out excess inventory. If the profit margin on a product is very high, credit terms may be more lenient in an effort to encourage the purchase. If the staffing is very limited in the credit and collection department, terms may be more lenient in an effort to get credit analyses done on a timely basis.
Some companies have what is called “Automatic approval” for orders totaling an amount less than a predetermined amount. In this case, the risk is considered to be low enough not to warrant the cost of a full-blown analysis. Other companies base automatic credit approval for small orders on the current credit reporting agency ratings.
When the order amount is above the limit for automatic approval, typically the credit department will require some level of analysis which might include: the new customer application, current credit agency reports and ratings, most recent financial statements, industry and supplier references, current bank information, and phone calls or personal visits to the prospective customer’s business.
Once the credit decision has been made, the new customer must be told the results. One way to deliver the decision is to make a personal visit to the customer. The advantage of this approach is that it gives you the opportunity to talk to the customer and begin to develop a relationship with the customer. It also gives you the chance to explain the credit policy and terms of the credit decision to the customer. If the credit decision is not as favorable as the customer may have hoped, it gives you the opportunity to coach the customer on ways to increase the credit limit.
The disadvantage of delivering the credit decision in person is if the decision is not what the customer wants to hear. In this case, the customer may be insulted by the lack of credit extended, and may feel restricted in his ability to place large orders in the future. The customer may not feel goodwill towards your company. If this situation occurs, being there in person may give you a chance to work out some of the issues and eventually promote goodwill.
Collection agencies are not involved in making credit decisions for potential new customers. Debt collection issues usually arise when credit decisions have been more lenient than perhaps they should have been for a particular customer. When debt collectors become involved with a customer, usually the credit line has been frozen and all future shipments and orders are placed on hold. To reestablish credit, delinquent customers must bring all accounts receivable collections to zero, and a new credit analysis must be conducted. It is easy to see why a credit department would be hesitant to begin extending credit again to a customer who has been significantly delinquent in the past. Something must be drastically different to cause a reestablishment of credit. Collection agencies and debt collectors through their collections work may be able to determine if the circumstances have changed in a positive way to warrant credit extension reconsideration. Extreme caution in this situation is definitely appropriate.
Click here if you are ready to go on to the next article in this seven part series Credit Analysis To Promote Successful Debt Collection 6 Of 7. Click here if you missed previous articles in the series Credit Analysis To Promote Successful Debt Collection 1 Of 7.
And be sure to check out the other articles in this series:
- Evaluate New Customers
- Credit Application Development
- Credit References
- Financial Statements and Credit Reports
- Credit Decision
- Purchase Orders
- 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.