Every successful business owner knows that a sale is only a good one when the money for it has been collected. In this sense business is very tangible and easily measured. Good collections often hinge on a company having a sound credit policy along with the discipline to follow it. A good credit policy helps a company translate strong sales figures on the income statement into an equally strong cash account on the balance sheet.
A big challenge is in deciding if a sale can be made to a new customer. As many a senior lending executive has told me you cannot charge enough interest to make up for lost principal. The same is true for sales. There is no margin to cover your cost of goods sold unless the product or service is paid for by the customer.
Traditionally, the five C’s of credit are character, capacity, capital, collateral and conditions. In my experience character is the most important trait but the hardest one to judge on an unknown entity. Capacity is next in importance and it can be evaluated through the use of third party sources and/or direct inquiries. This makes it the most useful trait to evaluate for the regular creditor. In general
collateral is not an option nor is the ability to asses a buyer’s capital structure. General conditions for an industry can be examined but extra effort and access is needed to really understand a given company’s environment.
A company has many options to use to determine if a customer has the capacity to pay for their purchase. Our next installment will go over the most commonly used sources. We will also unveil a new product to be offered by Premier Trade that focuses on helping sellers solve difficult credit decisions.