You see, the basis of Credit is trust. The word credit comes from the latin verb “credere” which means to believe or to trust. To me the first job of a professional credit function is to make sure the above question can be answered with a resounding “yes” every time. The first hurdle is to know who your customers is, if you are a regular reader of this article, this will not be the first time you have seen this statement and I will keep asking it as long as there is a need to ask it. Do you have the correct legal names of every customer set up on your ledger? Does the name printed on every cheque received match perfectly the name you have on your account? I know the answer is “no” and that is why I will keep asking! Knowing who you are trusting is the foundation that your entire credit function is built on and if you get that wrong at the start and so many do, you are doomed to failure from the start.
Then when you have the correct legal entity you still have to ask the question: “Do I trust them?” and this question can be broken down in two parts: “How much can I trust them with?” and “How long can I trust them for?”
In some cases the customer will be known personally to you and you will be in a good position to make that call. When the customer is not personally known to you (and to be honest, even the ones who are) you have to do some homework to establish their credibility. Things you can do include:
1. Check the information available – If they are a Limited Company, have they filed accounts? Are they up to date? Do they tell a good story? Are they making money? What is their Net Worth? How long have they been trading? Who are the Directors? Are they paying their bills on time? Are there any judgments registered against them? What credit limit is recommended? Do the ratios check out?
2. Call the Trade references, how do they treat their other suppliers.
3. Ask the opinion of the sales people but be warned, salespeople are by their nature optimists and in my experience other company representatives like van drivers are much more reliable.
4. Talk to your peer group, your fellow Credit Professionals, membership of professional bodies such as The Irish Association of Credit Professionals can add to your contacts and increase your knowledge of the business landscape.
5. Look at credit insurance, both as a source of information and a source of comfort that can help you to sleep better at night.
The above steps are highly recommended for all new accounts.
Another thing I find is that businesses who are very good at checking out new customers, they are not so good at checking their customers on an ongoing basis. Setting clear credit terms and setting the allowable credit facilities for each and every account that is reviewed and updated on an ongoing basis.
Some may say “If we did all that it would cost us a fortune” – I say “How much could a single bad debt write off cost?”
Do the sums and work out if it is worth the investment.