How to determine if your customer is credit-worthy

One of the major steps in managing your business finances is determining your credit policy. Whether extended to new or existing customers, you need to have a credit policy in place. It is important to understand that the simplest customer credit policy has two basic points:

• It should limit credit risk
• It should diligently investigate each company's credit-worthiness.

You should keep in mind that no matter how credit-worthy a customer is, you should never extend credit beyond your profit margin. This policy ensures that if you aren't paid, then at least your expenses will be. To gauge a company's (customers) credit-worthiness, you should put together a comprehensive credit application that contains the following:

• Name of business, address, phone and fax number
• Names, addresses, Social Security numbers of principals
• Type of business (corporation, partnership, proprietorship)
• Industry
• Number of employees
• Bank references
• Trade payment references
• Business/personal bankruptcy history
• Any other names under which the company does business
• A personal guarantee that the business owners promise to pay you if their corporation is unable to

Your credit application should also specify what your credit terms are, and what the consequences of failing to meet them. You will also want to indicate what late fees you'll charge, and that the customer is responsible for any attorney fees or collection costs that are incurred at any time, (either during or prior to a lawsuit); and the venue where such a suit would be filed. You should have your credit application form reviewed by an attorney specializing in creditors' rights, to make sure it is in line with your state's regulations. Once your potential customer has filled out the application, you will then need to verify the information. The best way to do this is by contacting credit reporting agencies. However, because credit agencies' reporting can be unreliable, it's also a good idea to call others in the industry, and try to determine that company's payment record and reputation. Keep in mind that most industries have associations that trade credit information.

You should also use your intuition in working with your customers. Clients, who want large credit limits, may or may not be a credit risk. Be sure to trust your instincts in determining who you want to extend credit to.

It is also crucial to understand that controlling when you get paid is a huge component in the survival, or failure, of your business. You need to think about when your bills are due, and make sure when you set up your payment schedule. This way you get paid in time to pay your bills. You may also be interested in taking advantage of pre-pay or early-pay discounts. This can literally save you hundreds of dollars over the course of a year.

If you have an existing credit policy that is not working, then you may just need to strength it. The following tips should help-

• You need to make sure every account is up-to-date on payments; if they aren't, start working to get them up-to-date now.


• You need to make sure you have a signed credit application with current contact information on file for every customer.

Keep in mind that the first item could take you some time, depending on how many past-due accounts you have. If you don't have that many, you will get the best results by calling them. You should start with the customers who owe you the most money and work your way down the list. If you need to send the account to a collections agency to get everything up to date. Once you have your credit in control, you will find that you are managing your business finances much easier.