How To Asses The Credit Worthiness of Customers
Before extending credit to a customer, a supplier should analyze
the customer credit worthiness, which will provoke a series of questions or
How To Asses The Credit
Worthiness of Customers
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?
What is the financial health of the customer? Is it a liquid
and profitable concern, able to make payments on time?
Do the customers' management appear to be committed to prompt
payment? Are they of high integrity? What are their personalities like?
What is the scope for including appropriate security in
return for extending credit to the customer?
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
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
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.
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