Credit Extension

A SURVIVOR'S GUIDE:
A/R Management in this New Economy

If you are a business owner you are surely aware of the impact A/R has on your bottom line. Traditional estimates are that for every dollar you have as a "non-performing" asset, you would need to bring in three dollars in new sales to offset its effect.

Economic times are very tough today and in turn your sales efforts may not be generating the results you enjoyed in years past. These two issues can create the perfect storm.

Couple this with the tight credit market and issues such as these can keep you from expanding your business, or even worse.

There is an old saying "A loan well made is 90% collected". Success in the A/R arena starts with a sound credit extension policy. Some aspects of a good policy would include:

Credit Application: If you have never done business with someone and they are requesting terms you need to have them complete a credit application. The application is used to assist in determining the credit worthiness of the applicant. Taking the application without processing it is not going to assist you in determining whether you feel safe lending your potential client money.

Processing: The information on the credit application must be verified. The corporate identity needs to be verified, vendors need to be contacted for references and you may even consider pulling a credit report on the principals of the company.

Any information that can't be verified should then be discussed with your potential client. If a client is not willing to wait a day or so while you process their application, they may have ulterior motives. It is not unreasonable to ask your potential client to be patient while you evaluate their credit worthiness.

Credit Evaluation: Once you have processed the application you will determine whether you feel comfortable extending credit. If you are willing to offer terms you should keep the terms short initially and consider lengthening the terms as your client builds a payment history with you.

If you are leery of extending terms to your potential client but still want to do business, a personal guarantee should be considered. This obligates the individual as well as the company for repayment of the debt. If your potential client refuses to personally guarantee the account in exchange for credit you may want to reconsider doing business with them.

Down Payments: Requiring a down payment is a great way to secure yourself when extending terms. If you can get enough up front to cover any costs or capital outlay you will minimize the damage done should the account go bad.

Determine what your cost is and then try to secure at least that much as a down payment. This also creates a situation where the customer has vested interest and is much more likely to follow through with full payment.

David Zibman is a senior account representative with C2C Resources, LLC. C2C Resources, LLC is a global commercial collection agency headquartered in Atlanta, Georgia. If you would like a free sample credit application and personal guarantee please email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .