Before extending credit to a new customer, check its credit history. The process is simple, and along with a sound credit policy, this simple step will protect your
Before discussing the process of obtaining credit information on your customers, let’s discuss the fundamentals of developing a sound credit policy. First, and perhaps most difficult, is to limit your credit exposure to any single customer to a limit that, if uncollectible, will not have catastrophic financial consequences. Easier said than done, especially if you are new in business and you’re trying to establish credit for your first customer. As a general rule of thumb, the smaller YOUR business, the less you can afford to lose. That’s why start-up business have to exercise extreme caution or get expert outside help to assist you in making credit decisions. More on that later.
The second element of a sound small business Is Be careful; however, not to rely 100% on information submitted by your customer. Don’t rely 100% on references provided by your customers. A credit application will also contain a space for your customer to provide a bank and perhaps a landlord reference. Both should be checked carefully.
Your credit policy may require your prospective customer to meet certain hurdles in terms of cash on hand in bank accounts or three positive credit references, and a bank reference. Some credit policies require that if the amount of credit requested exceeds a certain amount, a Dun & Bradstreet (“D & B”) report is required. D & B is a company that collects millions of pieces of credit data on millions of companies and sells that date in the form of credit reports to its subscribers. There are other providers of commercial credit reports for your small business as well, including Hoover’s. Recently, the consumer
Commercial credit reports are often more powerful predictors of your prospective customers’ ability to pay their invoices. The companies scour public records for such things as tax liens, UCC filings, bank liens, judgments, years in business, bankruptcy filings, and other information available in public records.
Check publicly available information. For example, the company’s social media activity and website. Often, you will be surprised by the information you find when searching a company name on the internet. Publicly listed companies are required by law to file quarterly and annual reports with the Securities and Exchange Commission (“SEC”), which are available for inspection online on the company’s website or financial services’ websites. Most public companies have a navigation tool for “investor relations” where you will find SEC filings and in many cases, annual reports containing the company’s audited financial statements.
What if financial statement analysis and credit underwriting is not your strength?
Factoring accounts receivable is a reliable method of converting your invoices into immediate cash, providing an immediate source of liquidity and cash flow when you deliver goods or services to your customer. Companies that provide this service are called factoring companies. A factoring company advances you funds against eligible invoices and conducts its own due diligence on your customers to protect you and them from predictable credit losses. Full-service factoring companies not only speed up your cash flow by advancing funds against your invoices, but some of them do the billing (invoicing) for you, and collect payments on your behalf.
Find out more about working capital solutions from our trusted factoring experts today.