Factoring and Credit Policy

Establishing and following a sound credit policy can help your business navigate the minefield of business bankruptcies. The object of a credit policy is to minimize the chances that any single bad debt write-off negatively impacts your business.

There is little question in the minds of economists that 2008 and 2009 will go down as one of the worst economic downturns in recorded history. Along with this grim reality comes an unprecedented number of business failures, reorganizations and bankruptcies. If you run a business that sells goods or services to other businesses, it is more than likely you experienced a bad debt write-off in 2008— or that you will in 2009. The challenge, then, is not necessarily to avoid doing business with a company that may end up in bankruptcy court, but to make sure that if you are extending credit to a customer that ends up in bankruptcy court, your business is not going to crater as a result.

Following a few simple rules can help you avoid making catastrophic mistakes. The rules must be maintained in a credit policy and followed by your sales and administrative teams.

First, develop a good credit application. Your factoring company can assist you with this. In your credit application, ask your customers or prospective customers to list their largest vendors, along with contact names, phone numbers and e-mail addresses, and check their references.

Next, if you are extending a significant amount of credit to a business with which you have had limited firsthand experience, request a confidential financial statement from their controller. Your factoring company can assist you with the financial statement analysis if you lack experience or training in this area.

Finally, set prudent limits. Your factoring company can assist you in this process as well. You want to make sure that the business failure of your customer does not lead to your own business failure. You can manage this type of risk by making some common-sense credit guidelines. Here are just a few:

  1. Limit your credit terms to Net 30 days
  2. Limit the outstanding balance any single customer may have at any given time to a certain percentage of your overall accounts receivable.
  3. Require that accounts representing over a certain dollar amount provide periodic financial statements.
  4. Require that accounts representing over a certain percentage of your overall accounts receivable be personally guaranteed by the owner (assuming they are privately held companies).

Having a factoring company is not a substitute for maintaining your own credit policy; however, a good factoring company can assist you by reviewing your credit policy from time to time and making recommendations. Ask to speak to executive management about their philosophy on credit and credit policy. Like your other business guidelines, a good credit policy is a living document that should reflect the economic realities of the time.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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