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Does your business operate in the B2B sector? If so, you’re probably familiar with the challenges and opportunities presented by offering customer credit.
While it’s a standard practice and often expected in B2B transactions, providing credit also introduces risks such as delayed payments or defaults, which can disrupt your cash flow.
To mitigate these risks, it’s essential to monitor how your business manages customer credit, starting with the initial credit assessment.
Collect Relevant Information
Typically, you would have new customers fill out a credit application. If your form has been the same for an extended period, it might be time to review and possibly enhance it with additional questions or a refreshed layout. Essential details to request include:
- Business name,
- Physical address and website URL,
- General contact number and email address,
- Employer Identification Number for tax purposes.
Consider asking for more detailed information, such as the length of time the business has been operational, its entity type, and whether it has a parent company.
For privately owned companies, you might want to request recent financial statements—or at a minimum, the latest income statement and balance sheet (public companies publish these in annual reports). Analyze the income statement for metrics like the after-tax profit margin, which you can determine by dividing net income by net sales. This figure should ideally be stable or show improvement year over year and be comparable to industry standards.
Examine the balance sheet to calculate the current ratio by dividing current assets by current liabilities, which indicates the company’s ability to meet short-term obligations.
Verify Through References and More
In addition to the data collected, checking references is crucial. Start with the company’s bank references to verify account balances and credit availability, and check for any recent loan covenant breaches.
Contact various trade references to understand the duration and size of their dealings with the prospective customer and their payment history. Furthermore, obtain a credit report from a major credit rating agency to view the company’s credit history and any serious financial issues like bankruptcies or judgments.
Lastly, consider implementing adverse media screening in your due diligence. This involves checking potential clients against media sources to identify any involvement in questionable or illegal activities, or any potentially troubling news such as impending lawsuits or business downsizing.
Enhance Your Chances
As a B2B company, you don’t have to view customer credit issues and the associated negative cash flow impacts as just part of business. By continually refining your credit assessment processes, you enhance your ability to avoid unreliable payers. We can assist in reviewing your processes and selecting the best metrics for effective credit management.
