Does your business take unnecessary risks when dealing with other companies? Giving credit is similar to giving out a loan, and many companies have probably experienced putting a lot of hours into a project, only to discover that the client is no longer able to pay.
The bigger an organization becomes, the more important it is that one is conscious, on all levels, of the risks one is willing to take when trading with clientele and potential clientele. These risk considerations are most often established with a credit policy. Based on the credit policy, one can raise awareness within the organization to what kind of risks one is willing to take in a potential trade. Here, one should use a credit rating tool to ensure that the potential risks are consistent with the way one acts and trades with companies.
A simple credit rating makes it possible to check if the company’s economic health is up to standard, and also evaluates the company management in relation to the type of industry it operates in. Moreover, a credit rating can give insight into whether one can trust the people involved in the company – both the management, the board and the owners. This can, for example, be examined by looking at whether there are any, or too many, bankruptcies amongst those affiliated with the company.
There are other alternatives to the credit rating assessment. The company can, for example, be on the forefront and use credit insurance, which can be a more expensive solution. In the worst-case scenario, one can be forced to use debt collection, but this is neither great for you nor your clientele since it can be both difficult to collect the debt and time-consuming for the company.
A third alternative is to ask for a prepayment. There are many businesses where payment is done this way, which eliminates the need to examine the economy of the client. Do remember that as soon as any kind of credit custom exists, it is relevant to assess the credit rating in order to avoid unnecessary risks in regards to losing money.
Simple recommendations:
- Build a history with your client before giving them large credits.
- Benefit by asking for prepayment from the start
- Create a credit assessment of your client
- Determine, as a minimum, a simple credit policy
- Consider credit-insuring the traders, if trading large sums.