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How do I decide whether to offer credit to a specific customer?


Having a standard policy that applies to all customers is a good idea for any business when deciding when to offer credit. But each customer's specific needs could influence your decision as well as your general policy.As always a decisions about offering credit must begin with a credit score and report. But what if your best customer, some one who loves your product and really wants it, has a lower score? Should you make exceptions to the standard rules?

This decision can get you in trouble with the Equal Credit Opportunity Act which prohibits the use of race, religion, gender, marital status, birthplace, or because an applicant receives income from a public assistance program in determining credit approval. If you start making exceptions to your standard rules you could find your self in a serious lawsuit for up to $500,000 or one percent of your business's net worth, whichever is less. It can get costly to make exceptions.

Some reasons that you might consider making an exception is for a customer who makes payments on a smaller account regularly. Credit history reasons are the only allowable reasons to offer credit. Giving a specific customer a small account to see how they will pay might be a good idea but it might mean you need to change your overall credit decision policy as well. This could get you a lot of bad debt. Customers with credit scores over 700 are statistically lower default risks. Customers with credit scores under 600 are very high credit risks.

Another way to offer higher risk customers credit is to offer higher interest rates. This can be a double edged sword with a customer getting further and further behind with the higher interest costs. But increasing their interest might also offset the risk to you.

There is some question if a number can be assigned to customers to determine whether or not they will make payments on time. There is of course a margin of error with the ways these credit score ratings are created, thus meaning that customers who would pay on time are denied credit, decreasing your sales and business. What does 720 mean anyway, it means that you customer has been making payments on time, hasn't been requesting credit very much and is not maxed out on their credit. But in reality is assigning these numbers a real measure of how a customer will actually pay you? Statistically the numbers seem to matter and help determine the potential a customer has for defaulting but as always a human cannot be pegged by a number as to their future behavior. Also the numbers don't really measure extenuating circumstances that can influence person's reasons for their credit scores.

One reason people go to local lending institutions is to get the human factor in lending decisions. Anyone who has watched "It's a wonderful life" remembers George Bailey's rebuttal to Mr. Potter's statement that the savings and loan gave loans to customers rejected by the bank. "Aren't customers better citizens if they have a bath and 3 bedrooms to call their own?" No one wants to be Mr. Potter and deny others credit but we don't want to be put out of business by bad debt either. It is a fine line between giving enough credit and taking to many risks.

The best policy both for legal reasons and for preventing high levels of bad debt is to have a standard that you don't deviate for specific customers. Keeping your policy one you can live by in all situations is the best.

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