Some of the questions that may form part of a credit evaluation of a particular company include the following:
Are you familiar with the company?
Is the company generally recognized in your market, industry, or community?
How long has the company been in operation?
Does the company have a physical address?
Do you know the management?
Who are the owners?
Has the company undergone a change of ownership?
Has the company undergone a change of management or a restructuring?
Is the company in bankruptcy or has it declared bankruptcy in the past?
One of the best ways to gain assurance regarding a company’s ability to pay is through references, especially from people you know and trust, or from other companies in your same line of business. There are credit reporting agencies that provide information regarding potential customers, generally for a fee. And it is not unreasonable to directly ask a company for references, if you are unable to obtain them from another source.
Monitoring your credit policy
The establishment of a credit policy and a customer credit evaluation are not one-time-only exercises. You may need to review your credit policy periodically, based on how your business is doing in terms of cash flow and profitability. Any changes that you need to make in your policy would need to be communicated to your customers, possibly negotiating new credit terms.
Your credit policy does not necessarily mean granting the same terms to all your customers, and does not have to remain constant over time. It is important to consistently apply your credit terms once they are established. But credit is extended based on an evaluation of the customer’s ability to pay. And this may change. Each customer’s credit profile should be updated periodically, especially as new information comes in, and as a customer’s payment history evolves. Credit may need to be restricted on a customer who consistently pays late, or who has accumulated a significant unpaid balance.