If you are granting trade credit to anyone you are in fact becoming a bank to them – in most cases a free bank, offering interest free credit for as long as they want to leave the account unpaid. If you see your role in this light you really should perform some checking to make sure they have the ability and willingness to pay their bills on the due date.
First things first – get your ledger vetted by a reputable Company and we warned not all information is the same and you can rely on some more than others.
You can create your own scoring systems based on:
- Credit scores from reputable agencies – these will give a score and a recommended line of credit. Depending on your experience you can build in a system where you say you are prepared to give two or three times the stated limit for selected categories of customers.
- The insurance limit you can get on the buyer – obviously having credit insurance will reduce your exposure considerably. There still will be times when you will trade above the limit allowed and when you do proceed with caution.
- Their payment performance with you – if they demonstrate low risk behaviour by always paying on time or even always paying on the same date every month that tells one story. If they are taking longer to pay month after month – that tells another.
- The industry sector they are in. Is it a growth area like agriculture or food or is it a declining industry like construction and retail. You can set a score accordingly.
- The cost of the goods you are selling – obviously the lower the cost relative to the selling price the more liberal decisions you can make.
You can also incorporate ratio analysis and other financial information and non financial information into the mix and when you have developed your system you can then simplify it into three categories – High Risk, Medium Risk and Low risk. Using colour coding or a traffic light system can add to the ease of the operation.
If you see the benefit in having such a system and do not have the time or resources to create it – I would be happy to help you put it together.
Operating a ledger without risk categories and preset Lines of Credit assigned to each account is simply asking for trouble. If you cannot see immediately where your risk is how do you think you can manage it?