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Developing a Customer Profile
Assessing a customer’s credit risk – the likelihood
of paying bills when due – is as much art as science. Whether
you can extend credit is for you to decide based
on cash flow needs and other factors. If the question
is: Should you sell on credit to a particular customer? The
answer is – it depends. Developing a customer
profile that includes comprehensive, accurate information
is key. Here’s what to include:
Company Basics
What is the company’s legal name and form? What
line of business is it in? How long has it been operating? Do
sales fluctuate by season? Is it a subsidiary of another
company that might provide a guarantee? Where does
the company stand vis-à-vis its competitors?
Management Team
Is the company managed by experienced professionals? What
background and skills do they have? How long has the
current team been at the helm?
Credit Rating
When it comes to a customer’s payment habits, past
behavior is usually an indicator of what you can expect if
you extend credit. Credit agencies publish ratings
based on whether a company pays on a timely basis and its
default tendencies.
Legal Problems
Is the company involved in any pending litigation? Have
there been any prior judgments against the company? Has
it ever declared bankruptcy? A history of legal problems
might be a red flag that warrants scrutiny.
Economic Conditions
Your customer might run a tight ship, but some things are
simply outside its control. Local or national, even
global, economic conditions may be having a temporary effect
on a company’s ability to pay. Maybe the whole
industry is in a slump. If you feel comfortable making
a decision that your customer will pull through, go ahead
and extend credit or negotiate new terms on existing debt. Chances
are you’ll be rewarded with the customer’s
loyalty.
There are numerous resources at your disposal for gathering
information to develop customer profiles. Start with
a reputable publisher of credit information. With the
customer’s permission, you might also consider getting
references from the customer’s bank. Also speak
informally with people in the industry and ask if they are
aware of any issues you should know about. If you are
considering extending a large amount of credit to a particular
customer, it might be a good idea to visit the company in person
for a first-hand look.
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