It can be easy to provide credit. You can be swayed thinking that your new customer is going to be one of your best – so, really, is there that much risk in providing them some credit? You have crosschecked the credit application against an ASIC search and there are no discrepancies – so what could go wrong? You find out 6 months later, when you are at risk of losing your business, as your new customer owes you lots of money and there appears very little way of collecting it.
What could you have done differently?
Although it is extremely important to get a credit application and personal guarantee form signed by your customer, there are other things you need to check before you decide to provide credit. Here is list of four of them:
- What is the age of the applicant?
Someone who is young (say under 30 years of age) may not have sufficient experience to successfully run their own company – so may pose a higher risk of credit default – in which case you need to consider more carefully if you should provide credit to them.
- How long has the company been in business?
If the company has not been in business for very long then this may also indicate a lack of experience by the applicant. It may also indicate something more sinister. The company may have been set up to replace another company that has collapsed. These companies are sometimes called “Phoenix Companies” and should be treated with extreme caution.
- Are there any charges over the assets of the company?
If there are charges over the assets of the company, then someone else has priority over you if the company has liquidity problems. This means that there is less chance of you getting your money.
- How long has the director owned his/her home?
The director has provided a personal guarantee and indicated that he/she owns a house – so it seems likely that you would be able to recover any outstanding debts if things go bad. But do you know how long the house has been owned? If a house has not been owned for long it may be an indication that there is not much equity in it – making the personal guarantee signed by the director less useful.
The points above highlight why it is important that an informed and objective decision is made about whether to offer credit to a new customer. Making an objective decision can be hard when you are being influenced by the prospect of getting a new large client. This is why larger businesses usually have separate departments where decisions to offer credit are made. Small businesses should try and use the same protocol, but if this is not possible, and the customer is asking for a substantial amount of credit, it may be worthwhile to ask your accountant or a debt collection agency to provide a risk profile. If potential customers are categorised as low, medium and high risk you can more easily make a decision about whether to offer credit.
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This information provides a general summary only and is not intended to provide specific advice for your individual circumstances. It is not a substitute for professional advice and should not be relied upon as such.
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About the Author:
Philip Waldeck is the Founder & Managing Director of Brodie Collection Services. He has over 20 years’ experience in the debt collection business and specialises in providing debt collection services to small and medium sized businesses. Get in touch via: www.brodiecollectionservices.com.au.
