When it comes to evaluating customers for credit, it may be time for some new approaches.
In a recent survey from the Credit Management Association, 30% of respondents said they expected to tighten credit policies in the upcoming quarter. And that’s no small feat, seeing as demand – and the number of credit applications – has picked up.
So how can you keep a pulse check on your customers (both new and old) and keep risk in check? It may be time to adopt a more stringent evaluation process to evaluate customers. Doing so is a matter of taking both quantitative and qualitative measures, experts say.
For one thing, a tactic that won’t work anymore is going by the customer’s payment history alone. Even if the customer paid within terms last month, that doesn’t mean it’ll pay on time again this month. Here are the expert-recommended strategies for a more thorough analysis:
• Conduct due diligence on the companies that the customer does business with. If one of the customer’s suppliers or customers goes out of business, the customer could lose its ability to pay you on time. That’s why it’s a good idea to look into how those other business entities are performing financially. Anything that seems murky should prompt a discussion with your customer.
• Insist on financials. It’s past the time when customers can decline to provide you this info for confidentiality reasons. Reviewing financial statements and cash flow – particularly zeroing in on the funds available for operating activities – is a must in this environment.
• Review any significant liabilities and loan covenants. You should be able to find this info in the customer’s financial statement. Here is where you can gauge whether the customer has an excessive amount of debts owed to other entities. Any loan covenant violations should send up an immediate red flag. Some red flags don’t get caught just by analyzing the numbers. It’s for this reason that experts recommend other, more relationship-based methods of assessing risk.
• Make a customer visit. This is the perfect way to get an inside look beyond the financial statements or projections. Keep an eye out for signs the customer might be struggling, such as boxes of very old inventory in the warehouse or a vacant receptionist desk.
• Study news in the customer’s industry. A huge company going kaput, a lawsuit, contract issues, union disputes – all of these things can provide you a lot of clues, even if they don’t directly involve your customer. Hint: You can use Google Alerts to let you know whenever the industry or any of its major players comes up in the news.
• Demand frequent info and updates from customers at the start. There should be a clause in your contract stating the customer must notify you when any significant changes take place, such as a change in one of the top managers. When your collectors are on the phone, they should also be asking from time to time, “What’s happening at your company? Have there been any changes recently?” Early, frequent communication can be the best way to prevent unwelcome surprises.