Making Credit Decisions

There are two groups within a business that can make a credit decision.

first group: the business owner, senior management, trusted employee, salesperson!

second group: any authorized individual who can comply with the credit policy

The obvious point: you do not need senior individuals to administer and/or authorize credit applications. A senior individual may want to have the final signature/decision on all applications (I can understand this in smaller companies), however, even then, a competent employee can deal with 95% of the entire function through systems and procedure, for example:

1) Credit up to £1500 – authorization by credit control MINIMUM REQUIREMENTS

* Sole trader/partnership: personal liability & trading over 3 years

* Limited company under 2 years: personal guarantee

* Bank reference – “would not enter into” or better

* No adverse credit information in past 2 years

* No adverse trade information

2) Credit £1500/£5000 – minimum authorization: manager

MINIMUM REQUIREMENTS

* Length of time in business over 2 years

* Limited Company

* Bank reference – “should prove good” or better

* Credit reference score 75+

* No adverse credit information in past 3 years

* No adverse trade information

3) Credit £5000+ – minimum authorization: director

MINIMUM REQUIREMENTS

* Length of time in business over 3 years

*Limited company, with latest accounts, credit amount is not to exceed the lower of 10% of ‘net worth’ or 20% of ‘working capital’

* Bank reference – “considered good” or better

* Credit reference score of 75+

* No adverse credit information in past 5 years

* No adverse trade information

PLEASE NOTE

THE ABOVE EXAMPLES HAVE NOT BEEN CONSTRUCTED FOR A PARTICULAR BUSINESS. ALL COMPANIES AND BUSINESSES HAVE DIFFERENT REQUIREMENTS FROM CREDIT SALES.

In (2 & 3) above, the credit controller/department can assess all the basic criteria and determine whether the application is a pass or a fail. A note of why the application has failed together with the application can then be sent to the manager in (2) above, or a director in (3) above, for confirmation of the assessment. It may be that the manager or director, in a failed application, can see a way to offer the customer either a lower credit limit, or request further security.

Whoever authorizes credit applications, for whatever amount, the important issue is that a system and procedure exists where applications can be accepted, but more importantly: rejected!

Your profitability may allow you to take more of a risk than you need to, thereby allowing you to maximize the sales potential. If, like the rest of us, you need to get just about all of your credit decisions right, using a risk assessment model will ensure you have a better chance of escaping bad debts than a business that does not assess a credit risk: yes, fairly obvious – but why is it used so little!