How Far Out On A Limb Are You Willing To Go?

Taking an objective look at new customers

One of the most basic business principles states that in order to remain viable, a business must constantly expand their customer base. Companies will branch out into new markets, increase market share with existing customers or find new applications for their products and services - all in the quest to increase sales revenue. Nothing reinforces this more than the reality that no matter how well serviced and maintained, the largest customer will eventually leave and need to be replaced. So, after expensive advertising and marketing campaigns, networking and generally doing everything possible to get that new customer to call or walk through the door, the need to confirm that this is indeed a customer and not a debtor becomes all that more important.

Some credit personnel immediately question why a commercial entity would suddenly change vendors or why an individual would want to do business with them. Some questions that might come to mind include:

• Did the previous provider fail to deliver the correct service or product?
• Is there a financial advantage in changing or using this company?
• Do they owe their previous vendor and are changing to avoid paying?

Would this be considered pessimism, skepticism or realism? The answer could be any of the three depending on past experience; however these questions are all applicable in today’s economic environment. Many companies that primarily provide services are unable to take back their products or efforts when their customers fail to pay, so how are they to protect their interests? The trick is taking an objective look at new customers.

Commercial Credit Reports

Commercial credit reporting has changed dramatically over the last 35 years. Gone are the days of relying on credit references provided by the company in question or waiting days or weeks for a response. (Besides, who would provide a vendor that wasn’t paid promptly as a reference?) Using standard credit applications is always recommended to obtain the proper billing address, contact person and phone number of the new customer; however, to make a truly informed decision more efficient options are necessary and readily available. Computer databases now gather, compile, classify and present pertinent credit data allowing businesses to anticipate future payment behavior of their customers based on historical information.

Thousands of companies across the country in a wide variety of industries contribute accounts receivable information monthly to various credit bureaus, including terms, recent high credit, current balance and aging. This accounts receivable data is typically broken down by industry and credit activity level so only the most current data is used in calculating the current days beyond terms. By reviewing past payment behavior and identifying trends and cycles, future behavior may be anticipated.

Many commercial collection agencies submit information to commercial credit bureaus about debtors placed, which is commonly the first place a business looks when seeking outside help with outstanding accounts. The presence of recent collection activity can indicate that a company is experiencing cash flow problems. Multiple placements for collections over a longer period of time can be a key indicator of a business that is in the habit of defaulting on financial obligations certainly not a good candidate for open terms. It is important to review the details on collection accounts to determine if the dollar amount, response time and payments justify excluding the extension of open terms.

Legal filings and records are gathered on a daily basis for judgments, liens, bankruptcies and UCC filings. Whether a company had a dispute with a vendor or was sued for negligence, an open judgment is a financial liability and the seizure of funds by a plaintiff could create a serious cash flow problem. Tax liens at the local, state or federal level can be enforced at any time and also put a financial burden on a company, resulting in vendors not being paid. Stressed or failed businesses that have sought bankruptcy protection in the past may have done so as the result of poor business models or decisions and may be doomed to repeat this type of action. UCC (Uniform Commercial Code) filings allow leasing and financial institutions to secure movable equipment, vehicles and business loans. While the filing of UCC’s is a normal business practice, a multitude of filings may represent a business that has little or no assets of their own. Insolvent businesses with many UCC filings leave little to nothing for unsecured creditors to claim.

When you combine the speed and accuracy of third party verified information with the minimal costs of the reports, the credit inquiry process is now fast and affordable.

Consumer Credit Reports

While commercial credit reports may be requested for any business entity without the knowledge or consent of the business, consumer credit information is protected by the Fair Credit Reporting Act (FCRA) and requires a signed authorization by the individual. Consumer credit reports provide a complete history of an individual’s credit activity including mortgage, automotive, medical, credit card and revolving accounts, as well as personal judgments, tax liens, bankruptcies and collection activity. All the information is used to generate a score between 350 and 850 with relative risks outlined below:

Consideration must be applied to all scores for the relative size, activity levels and end results for the reported details. A collection issue from years past may have been the result of a dispute or medical insurance issue that should not be used as the basis for denying open terms.

Using credit reports to gain valuable insight on the history of a potential new customer (or on existing customers requesting higher credit limits) leads to more informed decision-making. Access to past payment, legal and collection information will help increase confidence in extending open terms to those companies that add more to the bottom line. When you combine the speed and accuracy of third party verified information with the minimal costs of the reports, the credit inquiry process is now fast and affordable.