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Internal Credit Control - Opening Credit Lines

When extending credit to a new customer, the following basic information should be gathered for your credit evaluation and kept on file:

• Is the applicant firm individually owned, a partnership or a corporation? You must obtain full names of owners, partners or officers and all business addresses. This is a must. A follow-up form letter to the hastily approved customer may supply this information and the local city directory may be helpful with details of ownership or tenancy. You should, however, get the information before delivery of the merchandise. 
• How long has the applicant been in business? Statistics show that 50 percent of business failures are firms less than one year old, 75 percent are less than five years old. 
• At what bank does the applicant do business? What is the average size of his bank balance and are there any loans outstanding? The customer may have a financial statement which will reveal this, and certainly a phone call to their bank manager is in order. They might only confirm the existence of an account, unless your customer pre-approves release of the details. A carefully worded and signed application will gain you the most information. 
• What do the records show? Are financing agreements kept, or have legal suits been filed? If the amount of credit requested is substantial, additional financial information may be secured from an outside credit information source such as another supplier trade association or business reference. n What are some of the business firms with which the applicant is currently dealing? You will want to check with at least three companies to determine how much credit has been extended and the creditors’ payment experience with the applicant company. This procedure may help you and other businesses in exposing customers who exploit their suppliers. 

Watch for Patterns of Problems
It is a constructive idea to analyze those customers who have become collection problems and to note reasons for their delinquency. A pattern will probably be revealed. 

It may be found that some collection problems involve businesses which were in operation less than a year at the time credit was originally granted. This is a "red flag." It does not mean that a new business should be denied credit, but it does mean that additional information should be obtained to ensure that the business is potentially a good credit risk. 

Sometimes the credit manager will have to deal with a sales person who is overanxious or under-trained. In the desire to sell, they may make promises that lead to collection problems. When such a pattern develops in an area, it would then be wise to advise the sales manager about the problem. It is often expedient with large orders to send the potential customer a letter spelling out credit terms.

Some Delinquencies Are Unavoidable 
It is inevitable in granting credit that certain conditions cannot be foreseen and that there will be unavoidable delinquencies. 

It is usually acceptable company policy that credit losses within certain percentage limits can be sustained, as growth can only be achieved by reasonable risk taking. Reserves for bad debts and collection costs are an acceptable and recognized expense for business. A too-tight credit policy can dry up potential growth. A too-loose credit policy can be a great expense. 

By granting credit intelligently and by following good billing and collection procedures, it is possible to hold risk to an acceptable figure—to a balance between company growth and losses due to bad debts.

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