If you sell to other businesses,
giving credit is probably something you do without
even thinking about it. It's a normal part of
doing business. Your customers expect it...
This doesn't mean, however, that
you should give it automatically. Selling on credit,
without checking the customer's ability (and inclination)
to pay is a high-risk strategy. You might be lucky.
You might get away with it. But you might not.
And it's no good relying on the courts to get
your money if the customer's gone bust.
Credit checks allow you to make informed decisions
about which customers you extend credit to - and
how much you let them have at any one time.
The first stage is to ask new customers to complete
a credit application form This will give you basic
information about the business and will give you
enough information to approach a credit reference
agency (see below).
The form should ask for the following information
>Customer's full name and trading address
>Invoice address, if different
>The company's legal status - limited company,
partnership or sole trader
>Company information such as trading activity
and number of employees
>Credit required
>Name and address of two trade references
>Banking details
>Company registration number (if limited company)
>Name(s) of directors and formation date of
company (if limited company)
>Name(s) and home address of owner or senior
partner (if not limited company)
>Length of time the business has traded
The next step depends on how much credit has
been applied for. If it's not very much you might
just accept the risk and not do any further checks.
If it's a significant amount you take one or more
of the three following checks:
Trade references
Trade references should be treated with some caution.
A customer is unlikely to give you the names of
people who will give them a bad press. You should
remember as well that companies don't have to
respond to your request for a reference.
Draw up a questionnaire and make it as simple
to complete as possible. You should ask how long
they have known the customer, what credit terms
they offer them, average sales per month to that
customer and payment history - are they usually
on time, 30 days late, 60 days late etc. You can
also ask for any other useful information. Include
an SAE and offer to reciprocate in kind if needed.
Bank references
Also called a status enquiry, bank references
can only be given with the written permission
of the account holder and most banks will charge
you a fee for providing them. The reference will
be given in the form of an opinion as to whether
or not the customer can meet its financial commitments
and is good for an additional £5000 per
month (or however credit you plan on extending).
Remember that a bank's main loyalty is to its
customer not the enquirer and that this is an
opinion not a guarantee. The bank is not underwriting
the credit application.
Bank reference should only be used for small
value decisions or to support other reports.
Credit reference agencies
If the customer is a limited company (and if he
is, he has to disclose this fact on all business
stationer), he will have to file annual accounts
at Companies House and, for a fee, you can access
these accounts. Unfortunately many smaller companies
can file abbreviated accounts and your average
business person doesn't have enough financial
expertise to translate them.
The solution is to approach a credit agency and
get them to do the analysis for you. It will be
able to give you all of a country's background
information - names of directors etc as well as
a brief financial analysis of the company's financial
status, details of any county court judgements
against the company and details of any borrowings.
You will be asked how much credit you intend to
extend to that company and given an assessment
of the risk involved.
In an ideal world, of course, you would only
deal with customers who retuned a perfect credit
history when checked. Few companies have the luxury
of being able to do that. Credit checking allows
you to make calculated decisions so you minimise
the inherent risk trading on credit will always
have.
For more information about the products and services
of Leeds based MasterWatch contact
Mike Billington on 01113 22-55-100 or visit our
web site at www.MasterWatch.uk.com
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