If you are considering extending a line of credit to your customers, you need to be sure that you are not damaging your own cash flow and risking your business. It is important that you do your due diligence on a client before entering into a credit agreement to make sure that they will be able to pay back their credit on-time. Use a credit report to give you an insight into their payment history, financial stability and the way that they operate. This information will help you to decide whether to offer credit (or not). Once you have decided, you need to calculate a credit limit that you are happy with.
The major factor in your deciding upon a credit limit is whether the client can repay the credit regularly and on-time. You should have gathered a lot of information when you carried out a credit check, and this should be the basis of your final decision. If a client has been issued CCJ’s or filed for bankruptcy, then it is a warning sign that they are incapable of managing their finances. Check out the directors too; their previous history can tell you a lot about how they run a business.
Your decision would be much easier if you were able to speak with previous suppliers that the client has worked with. Ask the client for a list of trade references or suppliers that you can contact; then you can speak first-hand with people that have offered credit to the client about their experience. If the references are not from the same industry as you, then make sure you follow up directly with the company. An honest conversation will help to clarify your decision and hopefully give you peace of mind.
Many businesses will “massage the truth” to appear in the best possible light; it would be naïve to take them at their word. A credit report will go some way toward backing up the “facts” they’ve given you, but you should rely on your intuition too. If a client is claiming to have existed for a while, but you have never heard of them, you should do a bit of research.
When it comes to deciding a credit limit, there is no definitive answer. You will extend different limits depending on each client. You should be concerned about the client’s ability to repay the debt, but you also need to calculate how much credit you can realistically afford to offer. Clients will fall into one of two categories, High Risk or Low Risk. The Low-Risk clients are more desirable than High-Risk clients. You may already work with them, and they have regularly paid invoices on-time, they have a clean credit report and have been in business a long time. You can be relatively confident that these types of client will pay back any credit you offer. High-Risk clients, on the other hand, may have a tarnished report or have poor references. You should be conservative when setting limits and should opt for shorter payment terms too. Credit limits are not set in stone; you can set a date for review. If a client has proved worthy, then you can up their limit.
Credit management is one of the more difficult aspects of business, and you shouldn’t be afraid to ask for help. A credit report can be a valuable resource and shouldn’t be taken for granted. A third-party agency, like Commercial Domestic Investigations, can help to manage your credit control so that you can focus on more important tasks. To find out how we can help your company, contact us on 08444 159200, use our contact form or email firstname.lastname@example.org.