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Credit Granting - What you NEED to know

Learn how to protect yourself and your business from making bad credit decisions that could cost you hundreds or thousands of dollars.

Why is there a need to have a credit and collection policy?

Simply this: Without a solid plan you will not only make errors in extending credit, but you will have to face collecting past due accounts without the skills to accomplish either goal.

No one can guarantee that every account you open up will pay, and pay in a timely manner, but by having a plan in place, you will reduce the amount time spent collecting on past due receivables and the amount of money lost in unpaid accounts. Here are some suggestions for developing a simple, yet effective plan for handling credit and collections:

GET PROPER INFORMATION FOR SETTING UP NEW ACCOUNTS

This means that you need to have a good credit application. Your credit application should ask for the full names of the owners and anyone else who handles accounts payable. Along with their names, also get home addresses and phone numbers. There should be space available for the full business address, phone numbers and fax numbers too. If the customer uses a post office box, make sure they also include a street address. Watch out for fake addresses. Some companies will use "Mail Drops." These appear to be real addresses, but if you were to go to the address you would find a business, often in a strip mall, with a lot of mailboxes and postal services. The "suite" number or "apartment" number may really just be a box.

Some other important items to include on a credit application include: Length of time in business, the type of business (corporation, proprietorship, or partnership), bank account information and space for a few trade references. Many customers will volunteer many trade references as "proof" that they have good credit. Credit references alone are not good enough! It is not uncommon for people to list companies that they are paying and neglect to mention those that they are past due with. Therefore, do not put too much weight on the credit references. One item you should include (that most credit applications do not) is additional locations where the customer can be reached. This could include other business locations or offices, a second job, etc. If, for example, your customer owns a retail shop, they may own 2 or 3 other locations in addition to the one you are currently selling to.

A personal guarantee should be included on your credit application. If your customer is a corporation and they go out of business, you are pretty much out of luck. Taxes, banks and other secured creditors will almost always take all of the assets. At best, you may be looking at receiving a settlement of pennies on the dollar. Since you did business with the corporation, you cannot proceed against the owners - UNLESS YOU HAVE A PERSONAL GUARANTEE! Even with a personal guarantee, the owners could still file bankruptcy, skip out, have judgments and owe other creditors. However, many businesses do not gather good credit information or use personal guarantees. By having a personal guarantee, you will be in a better position than most creditors.

One other tip about personal guarantees: Make sure the customer signs only their name on the personal guarantee and that they do not include their title. If the customer includes their title, this could invalidate the personal guarantee.

It is important that your credit application includes an agreement to pay within your terms and an authorization to release information. In addition to paying within your terms, you may also want the agreement to include your policies on finance charges and that the customer will be responsible for attorney or other legal charges if they do not pay. The authorization to release information will allow you to contact the customer's bank and other credit references. Banks will rarely release information without a signed authorization.

Interregional Credit Systems, Inc. offers a credit application with our Credit Cruncher® software. This credit application was developed with more than 20 years of business in the credit and collection industry. Credit managers from many major national firms also contributed to the items that are on this credit application.

Click HERE to order Credit Cruncher®  now.

Click HERE for more information about Credit Cruncher®

CREDIT VERIFICATION

With the authorization on the signed credit application, you can mail or fax requests for verification to banks and other suppliers. A well-written letter requesting loan and banking experience, years having known the customer, etc. can be mailed or faxed to these banks or credit references. Make sure you attach a copy of your credit application with the SIGNED AUTHORIZATION when verifying with banks.

A well-written letter to a bank should include an idea of the average checking and/or savings account balance. Banks often will not give you a specific dollar figure, but can give you a generality, such as high 3-digit or medium 4-digit balance. The average balance is directly related to the customer's ability to pay. For example, you should not extend $10,000 of credit to a customer whose average bank account balance is low 3-digit. Include a spot in your letter to ask for NSF or overdraft experience. Also, ask for loan experience including the highest amount loaned. This can be extremely useful, as the bank most likely will take more time to research this person or business than you would. If the bank believes in them, it is a good sign.

You do not need to include as much detail when writing to trade references. Mostly, you want to know how long they have been doing business with the customer and the average amount of time it takes for the customer to pay. You also should inquire as to how much credit these other companies are giving your customer. Again, you can reduce your risk by learning what other companies have already researched. You need to be more cautious with trade references, however, than you do with banks. Many businesses do a poor job of getting credit information. If you are trusting them and they made a mistake; it becomes your mistake too. In the case of trade references, I would trust your own research more.

Credit Cruncher® by Interregional Credit Systems, Inc. also includes bank and trade reference verifications. You simply enter the name of the customer, then fill out the bank or trade references name and address right on your computer screen. You can print these one at a time, or enter several and print them all at once. They are instantly ready to be mailed or faxed. Trade verifications can also be e-mailed (Since banks require signatures, e-mail generally will not work with bank verifications.)

Click HERE to order Credit Cruncher® now.

Click HERE for more information about Credit Cruncher®

ESTABLISHING A LINE OF CREDIT

Once you decide to set up a new customer on open account, you need to determine how much credit should be assigned to them. There are many considerations, including sales potential. Having a good credit application and a process to verify information, you now have all the ingredients to establish a credit limit. All you need is the formula.

One of the most successful methods of determining lines of credit is to use a point system or credit scoring system. In this system, points are added or subtracted for the various pieces of information you have gathered and other knowledge you may have about the customer. Certain items carry more weight than others do. For example, you should place more weight on bank information than on information provided by trade references. Some items to include in your point systems are: years in business, average bank balances, loan history, NSF or overdraft history, trade reference experience, whether or not they signed a personal guarantee, etc. These items are all objective and are easy to be consistent with. Your point system should also include subjective items that can increase or decrease the point total. Some subjective items can include: quality of the area the customer does business in, previous experience with the owners, whether or not the company is nationally known and/or traded over stock exchanges, additional information provided by the customer (such as financial statements), etc.

Determining how many points to assign to each item can be tricky. It is important that you get consistent results. If you are creating your own point system, you likely will have to try numerous "dummy" cases to come up with totals that appear consistent. For example, bad "dummy" customers may have an average score of under 10 points, medium "dummy" customers may average between 11 and 25 points and good "dummy" customers may all end up with more than 25 points. Again, consistency is important.

Once you have a good point system in place, you then need to know how you take those points and use them to determine lines of credit. Every company will need its own formula. In fact, a single company may need several formulas if you sell different types of product lines, or sell to different types of customers. 25 points for one company can mean a credit limit of $1000 makes sense, while 25 points for another company could mean a $10,000 credit limit is reasonable. The idea behind the point system is to use the points to compare with other customers. In other words, if the average customer with a $2500 credit limit scored 21 points, then if a new customer scores 35 points their credit limit should probably be around $4000. Of course, customers with a low enough score should be put on a cash or C.O.D. only basis.

Creating and calibrating a point system can be difficult to create for people without experience in credit and collections. In fact, even for the most experienced credit managers it is a task that can often take many hours to create and perfect.

You have probably guessed by now that Credit Cruncher® includes a credit scoring system. The Credit Cruncher® credit scoring system can have you granting credit today, even if you have never given anyone credit before! All of the credit scoring goes on behind the scenes, so you never need to deal with the math and determining how much weight to put on each item. All you need to do is use the credit application and verifications included within the program, then enter the information gathered on the entry screen. The entry screen is simple and takes only seconds to fill out. A credit limit recommendation will appear right on your computer screen.

Credit Cruncher® allows for as many different types of customers as you need. It also keeps track of credit limits and even provides statistical information, such as the average amount of credit you are giving. Best of all CREDIT CRUNCHER® LEARNS AS YOU USE IT! Some people will always be willing to take more risks, while some are more conservative. Credit Cruncher® learns as you use it and adjusts credit limit recommendations to your style. The more you use it, the more consistent you will become.

Credit Cruncher®  has appeared in national trade magazines and is currently being used by both credit managers and home business owners. It is available for download through a secured server for only $74.95. It also is available on CD-ROM.

Credit Cruncher® can pay for itself with one good credit decision! One bad decision can cost you hundreds or even thousands of dollars. Choosing not to sell on open account also costs you money in lost sales. Many customers will go elsewhere if someone else is offering terms.

Click HERE to order Credit Cruncher® now.

Click HERE for more information about Credit Cruncher®

"In today's environment, this software is absolutely necessary!" - Robinson Laboratories, Inc.

Interregional Credit Systems, Inc.
P.O. Box 1059
Anoka, MN 55303
800-472-1288 toll free
763-560-1400
763-592-7994 fax

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