Learn About Commercial
Collections And Credit Granting
It is estimated that billions of dollars in delinquent commercial
credit is currently being carried on the books of both American and
international businesses. This figure changes as our economy grows or
contracts. Increased competition, diversification of product lines seem
to indicate that these figures will continue to move upward. Regardless
of the state of either the national or international economy, the
necessity to grant credit and to collect commercial receivables using
professional methods remains vital to all businesses. Credit Sales Volumes Are Important
The average commercial business sell between two to five percent of
their products for cash. The credit department is responsible for the
other 95 to 98 percent of the goods and/or services sold. Businesses
have varying percentages of their financial resources tied up in
receivables. Actual losses might range from one-half of one percent to
five percent of sales without serious results. This depends on profit
margin and other factors. Losses can explode to significant sums very
fast if not restricted by the credit manager. Good Customer Relations Are Paramount
The credit department must also be in tune with customer relations. This
quality is absolutely necessary in order for the company to prosper when
selling on credit. It is very, very easy to say "no" to prospective
customers, and it is also very easy to firmly demand payment at the time
of the sale. If this attitude reduces sales, then the credit department
is not performing its complete function, which is to create a balance
between sales and collection of money.
When extending credit to a new customer, the following basic information
should be harvested for your credit evaluation and kept on file:
Is the firm individually owned, a partnership or a corporation?
You must obtain full names of owners, partners or officers and all
business addresses. This is a must. A follow-up form letter to the
hastily approved customer may supply this information and the local city
directory may be helpful with details of ownership or tenancy. You
should, however, get the information before delivery of the merchandise.
How long has the applicant been in business?
Statistics show that 50 percent of business failures are firms less than
one year old, 75 percent are less than five years old.
At what bank does the applicant do business?
What is the average size of his bank balance and are there any loans
outstanding? The customer may have a financial statement which will
reveal this, and certainly a phone call to their bank manager is in
order. They might only confirm the existence of an account, unless your
customer pre-approves release of the details. A carefully worded and
signed application will gain you the most information.
What do the records show?
Are financing agreements kept, or have legal suits been filed? If the
amount of credit requested is substantial, additional financial
information may be secured from an outside credit information source
such as another supplier trade association or business reference. n What
are some of the business firms with which the applicant is currently
dealing? You will want to check with at least three companies to
determine how much credit has been extended and the creditors’ payment
experience with the applicant company. This procedure may help you and
other businesses in exposing customers who exploit their suppliers. Search for Patterns of Problems
It is a constructive idea to analyze those customers who have become
collection problems and to note reasons for their delinquency. A pattern
will probably be revealed.
It may be found that some collection problems involve businesses which
were in operation less than a year at the time credit was originally
granted. This is a "red flag." It does not mean that a new business
should be denied credit, but it does mean that additional information
should be obtained to ensure that the business is potentially a good
credit risk.
Sometimes the credit manager will have to deal with a sales person who
is overanxious or under-trained. In the desire to sell, they may make
promises that lead to collection problems. When such a pattern develops
in an area, it would then be wise to advise the sales manager about the
problem. It is often expedient with large orders to send the potential
customer a letter spelling out credit terms. Some Delinquencies Are Unavoidable
It is inevitable in granting credit that certain conditions cannot be
foreseen and that there will be unavoidable delinquencies.
It is usually acceptable company policy that credit losses within
certain percentage limits can be sustained, as growth can only be
achieved by reasonable risk taking. Reserves for bad debts and
collection costs are an acceptable and recognized expense for business.
A too-tight credit policy can dry up potential growth. A too-loose
credit policy can be a great expense.
By granting credit intelligently and by following good billing and
collection procedures, it is possible to hold risk to an acceptable
figure—to a balance between company growth and losses due to bad debts.
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