Handling marginal accounts.(business credit)

What goes into the decision making of extending credit to another business? Maybe it's their reputation or their financial strength. Whatever the reason may be, we put our respective companies at risk.

Decision-making processes such as credit scoring models, trade reports, references or profitability may minimize these risks. Whether these procedures function properly or not is dependent on a variety of factors, which usually vary from company to company. What you must always be aware of is the small percentage of those customers that fail to hold up their own end of the deal.

Not every company has a perfect portfolio. If that were the case, we would eliminate the use of our bad debt accrual every month. A Credit Manager's least favorite word is "write-off"--the very word leaves us ill. Managing that small percentage makes the difference regarding whether you write-off a large amount--or just a small portion. This small percentage of accounts is made up of what we call the marginal account: it's marginal because they seldom pay current due to lack of cash flow, credit history and often the capability to operate a successful business.

Marginal accounts can be very profitable if managed properly; but if managed poorly, the consequences can be detrimental. Hence the meaning of "marginal". So what are some ways we can minimize loss from that small percentage of customers that display financial distress early on in their credit history with your company?

Identification

The credit manager has to be able to identify those marginal customers. When attempting to identify your marginal customer, look for customers that purchase a little more than what was expected initially, and evaluate their aging profile. If they are purchasing more than they can afford and they are also paying beyond the agreed-upon terms, you should mark them down as a marginal customer. The key to this process is to identify these customers early-on in their credit history with your company--failure to do so will mean that you have to make up for lost time, later. Once you identify the customers you are looking for, do a little research. Part of the identification process is having a thorough understanding of your customer; key personnel, length of time in the industry and the product or service they sell plays a vital role in whether they will remain solvent in years to come. Keeping up with a marginal customer will ensure that you understand their business processes. Moreover, you are attempting to get this marginal account back to being current.

Communication