How To Asses The Credit Worthiness of Customers

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Before extending credit to a customer, a supplier should analyze the customer credit worthiness, which will provoke a series of questions or visits.

How To Asses The Credit Worthiness of Customers         

1.      Capacity

Will the customer be able to pay the amount agreed within the allowable credit period? What is their past payment record? How large is the customer's business in relation to the amount of credit requested?

2.      Capital

What is the financial health of the customer? Is it a liquid and profitable concern, able to make payments on time?

3.      Character

Do the customers' management appear to be committed to prompt payment? Are they of high integrity? What are their personalities like?

4.      Collateral

What is the scope for including appropriate security in return for extending credit to the customer?

5.      Conditions

What are the prevailing economic conditions? How are these likely to impact on the customer's ability to pay promptly?

6.      Bank references

These may be provided by the customer's bank to indicate their financial standing. However, the law and practice of banking secrecy determines the way in which banks respond to credit enquiries, which can render such references uninformative, particularly when the customer is encountering financial difficulties.

7.      Trade references

Companies already trading with the customer may be willing to provide a reference for the customer. They might be helpful or misleading since they don't understand underlying financial strength of the customer.

8.      Financial accounts

The most recent accounts of the customer can be obtained either direct from the business, or for limited companies, from Companies House. This is a good credit risk vetting way where the credit risk appears high or where substantial levels of credit are required, the supplier may ask to see evidence of the ability to pay on time. This demands access to internal future budget data.

9.      Personal contact

Through visiting the premises and interviewing senior management, staff should gain an impression of the efficiency and financial resources of customers and the integrity of its management.

10.  Credit agencies

Obtaining information from a range of sources such as financial accounts, bank and newspaper reports, court judgements, payment records with other suppliers, in return for a fee, credit agencies can prove a mine of information. They will provide a credit rating for different companies.

11.  Past experience

For existing customers, the supplier will have access to their past payment record. However, credit managers should be aware that many failing companies preserve solid payment records with key suppliers in order to maintain supplies, but they only do so at the expense of other creditors. Indeed, many companies go into liquidation with flawless payment records with key suppliers.

12.  General sources of information

Credit managers should scout trade journals, business magazines and the columns of the business press to keep abreast of the key factors influencing customers' businesses and their sector generally. Sales staff who have their ears to the ground can also prove an invaluable source of information.

Thomas karanja Is an Internet Marketer who enjoy offering Free online jobs. He also offers Free Computer maintainance Tips and softwares Visit and bookmark his blog.

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