Business as Usual
Now that you’re business is up and running, the most important thing is bringing new clients on board, right? You want to take as many orders as you can, but if the bill remains unpaid, then the order is worthless. If you intend to offer credit to customers, you need to have a clear credit policy established, a set of guidelines that determines which customers will qualify for credit and how an unpaid debt will be resolved.
When you extend credit to a customer you are essentially providing the customer with a loan, and just as a bank would screen applicants, you need to vet your customers to ensure that your company isn’t taking on unnecessary risk. The good news is that credit checks are the norm in the business world, your customers will expect to be screened, so checking even a valued customer’s credit report is nothing but business as usual.
The Three C’s
Character, capital, and conditions. It is easy to feel overwhelmed when you sit down with a customers credit report, but keeping the three C’s in mind will help you focus on the factors that are most likely to influence your customer’s ability to repay.
Character is both the most straightforward and the most complex factor in determining whether or not to extend credit. Character refers to the customers financial history, but also their personal integrity. Does the customer have a low credit score or a spotty record of repaying debt? Have they declared bankruptcy of failed to meet financial obligations? Do you feel that you can trust the customer? It may seem silly or superfluous to bring your feelings to bear on a financial decision, but if your gut tells you that a customer is not dependable then you need to respect your intuition.
Capital is fairly easy to assess. It is the borrower’s net worth, and a significant store of capital may be enough to offset past credit troubles or a problematic cash flow. In the end, you need to believe that your customer has adequate means to repay the loan in a timely manner.
Conditions refers to the specific economic conditions that might effect both you and your customer during the period of the loan. If your industry is in flux or if your company is faltering, you may need to protect your cash flow by limited the amount of credit you extend. The stability and securing of your business is paramount, and every time you extend credit you are putting your capital, your cash flow, and your own creditworthiness on the line.
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