Don't Go There

Fast Lane To Nowhere

Credit risks

Looking for high-growth customers to help propel your growth? Careful: They might actually hasten your demise. Most start-ups welcome virtually any new client--even better if it's a high-volume account. But what if one such prospect wants a line of credit and your credit search reveals inordinate growth rates? Sounds great, but it should give you reason to pause.

High-growth companies are often seen as good credit risks, but they must be evaluated closely because "they can quickly outstrip their resources, which in turn hinders them from keeping up with production," cautions Mahmud Haq, president and CEO of Compass International Services Inc., an accounts receivable management firm in New York City. A company growing 40 percent or more a year "can come crashing down just as quickly, leaving you and many other creditors holding the bag," adds Haq.

Before selling to high-growth customers, and especially before extending credit to them, Haq urges you to take the following measures to help ensure high growth doesn't mean high risk:

  • How far? Go beyond your normal credit verification process when evaluating high-growth prospects. In addition to your normal credit guidelines and practices, get a credit report, collect all available financial and operating data, and get a thorough grasp of the company's business and operations. Some high-growth companies fixate on increasing production to the exclusion of all else. Assess whether the prospect provides adequate customer service, does a good job recruiting and training employees, and maintains control of payables and receivables.
  • Why high growth? Do what's necessary to understand the factors behind the prospect's growth rate. Long-term rapid growth may simply indicate a competitive edge, superior sales force or other real advantage. If growth has not been long-term, and market advantages aren't apparent, you should investigate further.
  • What philosophy? Spend extra time with the prospective customer. Talk to staff people at all levels to glean information on corporate attitude, goals, stability, trends, history and mission.
  • Who's who? Look carefully at references, especially those lacking a long history with the prospect. Fast-track companies try to keep solid relationships with long-standing suppliers, so focus on the newest references, who may provide a more accurate picture of problems the company has had.
  • Which way? How will the company fare in an adverse market? Study industry trends and conditions. Do you have more than one high-growth prospect or client in the same industry? All the more reason for close monitoring. Subscribe to trade publications to maintain an edge.

While fast-growing companies can be valuable clients--and many can attribute growth to planning and hard work--don't let growth rates lull you into a false sense of security.

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This article was originally published in the July 1999 print edition of Entrepreneur with the headline: Don't Go There.

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