Extending credit to a business customer is more than a mere courtesy. It’s a decision, and ultimately a policy, that can impact your company in both positive and negative ways. On the positive side, it’s a way to solidify and deepen business relationships by helping your customers procure the products and services they need to maintain timetables and uphold their end of the business bargain. However, on the negative side are the inherent risks that come with the practice of extending credit. Finance departments know all too well how much damage overdue invoices can do to the financial health of their companies. They understand that their ability to pay their own bills can be put in jeopardy by late- and non-payers.
But, the negatives that can accompany B2B credit can largely be avoided if you complete the following to-do list – critical tasks that can help you accurately size up the financial health of your business customers.
To-Do #1: Ensure the business is actually what it claims to be – This can be accomplished by confirming company credentials such as its annual revenue, location, number of employees, years in business, etc. You might consider requiring the completion of a customer application that contains all pertinent company information, financial history and bank and trade payment references. This will give you a good overview of the customer’s current situation. But, don’t just rely on information supplied by your customer. Check at least three references and see whether their comments are accurate. If they are not, proceed with caution.
To-Do #2: Properly assess the business’ payment/credit history – A customer’s payment history is one of the best predictors of future behavior and providing it should be a requirement. If the customer refuses or finds providing that detail a challenge, red flags should go up. You can also use credit evaluation tools such as a business credit report or principal credit report to streamline this process.
To-Do #3: Look for issues that could affect the business’ ability to pay – This is another area where a business credit report can be of assistance. The goal is to uncover any hidden factors that could negatively impact the customer’s financial behavior going forward, such as lawsuits, past bankruptcies, pending judgements and regulatory citations. And, public information can play a helpful role here as well. Check news outlets and social media platforms for reviews and other relevant information about the customers. Finally, take the customer’s responsiveness into account when furnishing all of this information to you. If they seem reluctant or unresponsive to phone calls and emails, they may not be a good risk.
To-Do #4: Determine the amount credit and terms you are willing to extend – One of the most effective ways to reduce risk is to restrict how much credit you will extend to a customer. Look at things like their annual sales and debt-to-asset ratio to make this determination. You can protect yourself even further by adjusting interest rates, minimum payments and terms based on the customer’s financial metrics. Alternatively, you can structure terms in a way that a customer can “earn” more credit and less restrictive terms as they go. Whatever requirement you come up with, take note of the company’s reaction to them. If they hesitate or try to negotiate things that are more in their own favor, think twice before proceeding.
Checking off the items on this to-do list and using some of the credit reporting tools that are readily available to you will go a long way toward mitigating your B2B credit risk and ensuring successful credit management.