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The five C’s of credit every SMB needs to adopt

Risk management and good credit management are key to keeping a business healthy. Before signing up new creditors, most businesses will (or should!) perform a thorough check on the company and its director/s to evaluate its risk exposure.

Statistics show future losses can be reduced substantially by looking at the people behind a business and any related entities they belong to.

Before offering credit or signing a new customer, Veda recommends businesses adopt the 5 C’s of credit – character, capacity, capital, cashflow and conditions – and use these as a guide in assessing the credit risk of potential creditors.

1. Character: Research the people behind the organisation you are dealing with. It’s important to assess a person’s willingness to pay, based on their overall attitude, their company values and the financial track record of the business and its leaders. Check for any signs of a dark financial past. Factors such as past defaults or court actions can give important insight into the financial and ethical standards behind the people running the business.

2. Capacity: Assessing the prospective organisations capacity to generate sufficient cashflow to cover any outstanding debts should be the highest priority of any credit manager. This is critical before investing in a company or extending a large amount of credit.

3. Capital: Understand your customer’s capital base, including their cash and other assets, as well as shareholder commitments. This is important to ensure credit has not been extended to an organisation that can’t afford to repay their debt.

4. Cashflow: Cashflow is the “lifeblood” of any business. Poor credit control will greatly affect cashflow and the ability to pay debts on time, so it pays to develop an understanding of the financial situation of the business to which you are extending credit. This will give you an indication of how swiftly they may pay you for your products or services and the likely impact on your company finances.

5. Conditions: The current economic conditions in each marketplace may affect the ability of a business to repay debt on time, which may require adjustment of your credit policies. Consider factors such as the impact of international economic conditions on the domestic market, such as offshore financial volatility and fluctuating exchange rates, as well any changes in the political landscape. Is the prospective customer susceptible to economic downturns?

But according to Veda’s head of commercial risk Moses Samaha, “Good credit management doesn’t stop there. Businesses should also continue to monitor their credit portfolio to limit exposure to risk from late payment and external administration.”

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Lorna Brett

Lorna Brett

Lorna was Dynamic Business’ Social Web Editor in 2011/12. She’s a social media obsessed journalist, who has a passion for small business. Outside the 9 to 5, you’re likely to find her trawling the web for online bargains, perfecting her amateur photography skills or enjoying one too many cappucinos. You can follow her on <a href="https://twitter.com/#!/dynamicbusiness">Twitter @DynamicBusiness</a>

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