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Establish credit worthiness first to protect from credit risk

If sales via credit keep your business moving and cash flow steady, credit risk management will no doubt be a major focus. To protect against the dangers faced by late payment and bad debt, start by deciding the credit worthiness of all customers as part of a sustainable credit control process.

Credit worthiness an ongoing process

Checking the suitably of your customers for credit shouldn’t start and end while establishing the initial relationship, it needs to be an ongoing process to fully protect revenue. For new customers, it would be wise to only assess those who borrow above a certain amount so you’re not wasting time and resources on expenses that can comfortably be covered.

As the business relationship progresses, set a process to re-evaluate credit worthiness at least once a year, particularly if the customer contributes a large portion of your revenue. Businesses and their financial situations don’t always strengthen over time, and by keeping an eye on their payment behaviour you have a better chance of forecasting and avoiding any non-payment.

Many ways to check customer suitability

There are a variety of approaches you can take to check credit worthiness, so choose one which suits your credit control process. After obtaining a credit application form, you have the option to first obtain a credit report from a third-party referencing agency. You’ll gain objective information on a business’ financial performance and any non-payment disputes, while a credit limit recommendation is also provided.

Alternatively, you can ask the customer’s bank for a reference regarding their ability to meet payments, or request a trade reference from another supplier to the debtor. If you’d like to take a more personal approach, a visit to the customer’s premises to speak with members of staff about how the business is performing can also yield helpful information.

Keep a firm grip on processes to protect

With a decision made on whether credit is to be offered and an amount set, it’s imperative to follow processes strictly to protect. As sales increase, review individual credit limits and decide if it’s beneficial to increase them for certain customers. Don’t assume that just because a customer has made each payment on time so far, it will continue. Consider the macro environment of the buyer’s industry carefully.

If there are growing concerns over credit limits and the ability of customers to pay, review the overall terms set and think about adjusting payment periods to ensure cash doesn’t dry up. In this instance, having sufficient liquidity will be a major benefit, as it ensures there’s enough capital to continue operating while waiting for funds.

When it comes to credit, by thoroughly assessing the credit worthiness of all customers – potential and current – you can make sure the gains outweigh the risks.

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