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Commercial Collections And Credit Granting
It is estimated that billions of dollars in delinquent
commercial credit is currently being carried on the books of both
American and international businesses. This figure changes as our
economy grows or contracts. Increased competition,
diversification of product lines seem to indicate that these
figures will continue to move upward. Regardless of the state of
either the national or international economy, the necessity to
grant credit and to collect commercial receivables using
professional methods remains vital to all businesses.
Credit Sales Volumes Are Important
The average commercial business sell between two to five
percent of their products for cash. The credit department is
responsible for the other 95 to 98 percent of the goods and/or
services sold. Businesses have varying percentages of their
financial resources tied up in receivables. Actual losses might
range from one-half of one percent to five percent of sales
without serious results. This depends on profit margin and other
factors. Losses can explode to significant sums very fast if not
restricted by the credit manager.
Good Customer Relations Are Paramount
The credit department must also be in tune with customer
relations. This quality is absolutely necessary in order for the
company to prosper when selling on credit. It is very, very easy
to say "no" to prospective customers, and it is also very easy to
firmly demand payment at the time of the sale. If this attitude
reduces sales, then the credit department is not performing its
complete function, which is to create a balance between sales and
collection of money.
When extending credit to a new customer, the following basic
information should be harvested for your credit evaluation and
kept on file:
Is the 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.
Search 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.
Get free information and advice on commercial
collections.
MORE RESOURCES:
Credit - Google News
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