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A procedures and checks to follow when offering credit to your customers 
   


 

 

Deciding to give credit?
Giving credit to any of your customers or clients is a major decision and should not be taken or given lightly. Ensuring the credit worthiness of these customers or clients is a major role for any small business and there are various methods of doing so. Please remember that even if your customer comes out of the credit checking with glowing colours, you or your accounts team must stay continually vigilant throughout the trading relationship.

Credit or Cash??
It is essential for every company to have a well thought our credit checking procedure. A credit manager is constantly faced with customers taking credit facilities for granted because they already have credit elsewhere. This should not be an automatic right, and customers should be aware of this before they ask for an account - ensure your sales team is aware of this before his /her appointment with a potential customer!!

Unfortunately companies do offer credit facilities without seriously questioning their reasons for doing so . Credit managers are also faced with the “traditions” of credit and will open an account as they feel that such clients would only operate on such terms - is this really the truth? Would such a valued customer trade elsewhere is credit was not available?

If credit has found a sure hold on your business, then you really need to be well organised initially before you incur debt. If requested then ensure the customer understands your credit policies and terms and then ask the customer to complete a “Credit Request”

The Credit Request Form 
A credit request form gives essential accounting details of a potential customer. It should therefore be designed with the credit manager in mind . Details such as:

  • Names of the person who draws up the payment each month
  • The names of financial managers/directors
  • Name of the Managing Director
  • Banker details
  • Name and Address of 3 referees ( current suppliers of the customer)
  • Approximate value of annual intended sales
  • Legal Structure of Business
    • Public Limited Company
    • Partnership
    • Sole Trader
    • Private Limited Company

Filling in this form plays a role in finding the credit worthiness of a potential customer and if you have prepared a detailed credit application form you should be able to gain accurate information regarding the customers credit records. Here are few way to collect such information:

 

 

RULE NUMBER ONE - ‘NEVER grant Credit unless it is absolutely necessary’.

Public Limited Companies
Limited companies are required by law to file certain details about their affairs with the Registrar of Companies. For a small fee members of the public may look at any limited company’s file at Companies House. I theory you should be able to gain access the potential customers last published accounts giving detail of the structure and size of their company. Be aware, however that the Company’s Act insists that large public companies file their accounts within seven months after year end and is more lenient with smaller businesses. You have to consider, therefore, if this information would be accurate enough for your business to risk setting up a credit account.

Credit Reference Agencies
There are a number of agencies that specialise in providing credit status reports on certain companies. Depending on the agency you choose to provide this information for you will depend on how they charge they also operate in various ways to provide the information you require. Some will ask for details over the telephone and post their results others have an on-line database in which you can access with a computer over a standard telephone line. Not all the details are up to date however, but it can give details of previous county court judgments which can prove a deciding factor in whether to agree a credit account

References
A lot of companies gain information directly from referees and because your potential customer is still dealing with these referees, you will tend to get more accurate information regarding their credit worthiness. It is also worth remembering that a good Credit Assessment form can be vital and should be designed with easy yes/no options and tick boxes for but at the same time probing and detailed. However, you have to get the co-operation of these referees and not all are willing to submit information regarding their relationship with their customers. The downfall with this arrangement is that a potential customer would only give names of referees they have a good relationship with and this can taint the overall credit picture.

Credit Trade Associations
A lot of businesses are now setting up credit associations with credit managers dealing in the same or similar trade. Current accounting trends are discussed and opportunities to take references through association is rather than from specified referees is probably the best methods of gaining this information. By avoiding pre-selection you can get a clearer picture.

 

  
 
   
 

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Last updated: January 07, 2002.