You Owe It To Yourself

Checking Credit

Every customer requesting credit should complete a credit application. From a marketing perspective, you may decide to call this document a "customer profile" or "client data sheet," but what's important is that you get the information you need to make a sound credit decision. Along with the application form, you may also ask for financial statements, annual reports, and other background information on the customer.

Don't just accept the credit application at face value; do some independent research to verify the information. Just as you may have different credit requirements based on the amount of credit requested, you may also vary the extent to which you check out each account based on the specific circumstances. Most importantly, exercise consistency and thoroughness. A good place to start is with an independent credit reporting agency, such as Dun & Bradstreet or TRW. Some experts recommend checking with at least two sources, since their files will rarely be identical. Check your telephone directory under "credit" for agencies and brokers serving your area.

If possible, visit the customer's facility. Does it project a well-maintained, stable and prosperous image, or is there a sense of shabbiness or decay? You might also call the local Better Business Bureau; though they won't give you a credit rating, they can tell you if there's a record of complaints against the company. One or two disputes against a sizable organization probably isn't significant, but a long list of complaints should make you cautious.

Take the time to check the credit references your customer supplied. Find out how long these references have been doing business with your customer. Your customer may pay them on time, but if all the credit references have had relationships of two years or less and your customer has been in business for twenty years, you should find out who they bought from before. Also, find out what credit lines other vendors have extended and factor that into your considerations.

A potentially sensitive situation may arise when a customer is also a friend. You might be more comfortable attributing your requirements for credit information to a third party. You can say something like, "I'm sure you're good for the money, Joe, but my CPA says we have to have this information on file for every customer." And friend or not, if a customer balks at giving you adequate credit information, you need to seriously consider the level of risk you are taking.

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This article was originally published in the October 1996 print edition of Entrepreneur with the headline: You Owe It To Yourself.

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