Granting in-store credit to your customers can grow your sales and increase your profits. It allows existing customers to purchase more of your items and potentially attracts new clients. Before granting credit, you must ensure that your customer has the means and desire to pay his invoices. Developing a written credit policy sets out the procedures to analyze a customer’s financial risk. The policy should comply with federal and state credit laws, such as the Equal Credit Opportunity Act, so all customers are evaluated fairly.
Credit Report Analysis
Your customer’s business credit report should be the first document you analyze. It shows the name and address of your customer’s creditors and the opened, closed, current and delinquent accounts. You are looking for customers with high credit scores that are current on their obligations. Have your customer complete a credit application and make sure an officer with the authority to bid the company signs the application. Business credit reports are available through agencies such as Dun & Bradstreet, Experian Business and Business Credit USA.
Measuring Credit Risk
The credit risk is how likely your customer is to default on her invoice payments, go out of business or file for bankruptcy. The credit risk is based on the customer’s past credit history, including account charge-offs, accounts that are overdue 60 days or more, the number of accounts in collection and the number of recently opened accounts. The credit risk also includes lawsuits filed against your customer for unpaid invoices, judgments obtained against your customer and prior bankruptcies. The credit risk score is usually included with the customer’s credit report.
Measuring Financial Risk
You can determine your customer’s financial risk by analyzing his business financial statements. Look at your customer’s cash flow, including how fast accounts receivable accounts are collected. The sale price of your customer’s goods and services should be enough to cover the costs and still leave a profit. You want to look at the customer’s assets in relation to the liabilities. Use financial ratios to see if your customer’s financial statements are in line with the industry average or if they are stronger or weaker.
Measuring Business Risk
Business risk measures your customer’s ability to remain a going concern. Business risk assesses the long-term continuing demand for your customer’s products or services. It also takes into consideration your customer’s ability to introduce new products to the marketplace. Business risk looks at how changes in demand impact your customer’s profits. Other factors influencing business risk are the number of your customer’s competitors and the size of their operations. Analyzing your customer’s overall financial risk determines whether you should grant in-store credit along with the initial credit limit.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.