This
FREE article will teach you how
to save
TIME and MONEY
by making intelligent credit decisions
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
CruncherŽ 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 CruncherŽ
now.
Click
HERE for more information about Credit
CruncherŽ
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
CruncherŽ 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 CruncherŽ
now.
Click
HERE for more information about Credit
CruncherŽ
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
CruncherŽ includes a credit scoring system.
The Credit CruncherŽ
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
CruncherŽ 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 CRUNCHERŽ
LEARNS AS YOU USE IT! Some people will always be willing
to take more risks, while some are more conservative. Credit
CruncherŽ 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
CruncherŽ 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
CruncherŽ 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 CruncherŽ
now.
Click
HERE for more information about Credit
CruncherŽ
"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
Š
1999 - 2000 Interregional Credit Systems, Inc. All Rights Reserved.
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