Deciding to give credit?
Giving credit to any of your customers or clients is a major decision by a credit
manager and should not be taken or given lightly. Ensuring the credit worthiness
of these customers or clients is a major role for any credit manager and there
are various methods of doing so. Please remember that even if your customer comes
out of the credit checking with glowing colours, you or your accounts team must
stay continually vigilant throughout the trading relationship.
Credit or Cash??
It is essential for every company to have a well thought our credit checking
procedure. A credit manager is constantly faced with customers taking credit
facilities for granted because they already have credit elsewhere. This should
not be an automatic right, and customers should be aware of this before they
ask for an account - ensure your sales team is aware of this before his /her
appointment with a potential customer!!
Unfortunately companies do offer credit facilities without seriously questioning
their reasons for doing so. Credit managers are also faced with the “traditions” of
credit and will open an account as they feel that such clients would only operate
on such terms - is this really the truth? Would such a valued customer trade
elsewhere is credit was not available?
If credit has found a sure hold on your business, then you really need to
be well organised initially before you incur debt. If requested then ensure
the customer understands your credit policies and terms and then ask the customer
to complete a “Credit Request”
The Credit Request Form
A credit request form gives essential accounting details of a potential customer.
It should therefore be designed with the credit manager in mind . Details
Names of the person who draws up the payment each month
The names of financial managers/directors
Name of the Managing Director
Name and Address of 3 referees ( current suppliers of the customer)
Approximate value of annual intended sales
Legal Structure of Business
Public Limited Company
Private Limited Company
Filling in this form plays a role in finding the credit worthiness of a potential
customer and if you have prepared a detailed credit application form you should
be able to gain accurate information regarding the customers credit records.
Here are few way to collect such information:
RULE NUMBER ONE - ‘NEVER grant Credit unless it is absolutely necessary’.
Public Limited Companies
Limited companies are required by law to file certain details about their affairs
with the Registrar of Companies. For a small fee members of the public may
look at any limited company’s file at Companies House. I theory you
should be able to gain access the potential customers last published accounts
giving detail of the structure and size of their company. Be aware, however
that the Company’s Act insists that large public companies file their
accounts within seven months after year end and is more lenient with smaller
businesses. You have to consider, therefore, if this information would be
accurate enough for your business to risk setting up a credit account.
Credit Reference Agencies
There are a number of agencies that specialise in providing credit status reports
on certain companies. Depending on the agency you choose to provide this
information for you will depend on how they charge they also operate in various
ways to provide the information you require. Some will ask for details over
the telephone and post their results others have an on-line database in which
you can access with a computer over a standard telephone line. Not all the
details are up to date however, but it can give details of previous county
court judgments which can prove a deciding factor in whether to agree a credit
A lot of companies gain information directly from referees and because your
potential customer is still dealing with these referees, you will tend to
get more accurate information regarding their credit worthiness. It is also
worth remembering that a good Credit Assessment form can be vital and should
be designed with easy yes/no options and tick boxes for but at the same time
probing and detailed. However, you have to get the co-operation of these
referees and not all are willing to submit information regarding their relationship
with their customers. The downfall with this arrangement is that a potential
customer would only give names of referees they have a good relationship
with and this can taint the overall credit picture.
Credit Trade Associations
A lot of businesses are now setting up credit associations with credit managers
dealing in the same or similar trade. Current accounting trends are discussed
and opportunities to take references through association is rather than from
specified referees is probably the best methods of gaining this information.
By avoiding pre-selection you can get a clearer picture.