Extending credit is a risky process

Jim Ullery For The Business Review

The best way to increase sales output is to give your sales staff the ability to penetrate and create new markets. One of the best ways to accomplish this is to extend credit.

However, extending credit should be viewed as a potentially risky business practice. It is important to remember that it is never wrong to make a bad loan or extend bad credit. It is only wrong if you do not know it when you make it. If you make it, you must shore up the obligation through the use of a strong, disciplined follow-up system.

The point can be made that the practice of granting credit and the resulting collections effort was the brainchild of a marketing executive. The premise was that if the client were not able to pay for the product or service, an incentive in the form of a "buy now pay later" clause would sell more product. The brainchild worked.

There needs to be an understanding of the ramifications of investing in this type of sale. For intelligent approval of a client to purchase under extended terms, the credit grantor needs to have the ability to evaluate the risks and rewards of the sale. Very often the credit-granting business does not make a thorough credit evaluation. The sale becomes about greed--just get the order--and no consideration is made on how marginal an investment is being made.

Every credit decision has a corresponding level of risk associated with it, ranging from premium A1 credit to marginal and high-risk exposures. Each can look like the other. A very good account can seem like a high risk, and a sophisticated high-risk account will do whatever is necessary to seem to be an A1 credit. The job of sorting out the risk level is the challenge for the credit grantor when a determination is being made on the credit exposure.

Another aspect that needs to be considered is the demographic of the target businesses. There are more businesses with inadequate working capital than there are healthy organizations. These are the businesses that dream the American dream. The business leadership seeks to create the best in life and work for all parties. These businesses have a noteworthy ability to create the perception that things are really much better than they are. In reality, the firms have made their suppliers proxy shareholders in their business.

A contractor in the upstate New York market developed a significant marketing piece to share with his client base and suppliers. This 16-page booklet outlined projects and gave details of the strengths of the organization. It was filled with pictures of the contractor's employees working on prestigious jobs. Pictures supported the apparent strength of the organization, although the descriptions did not point out that the equipment being used on job sites was rental equipment that was overdue for rental payment.

When it came to the narrative, the president of the firm seemed impressed with the company's recent Dun & Bradstreet report of net worth. A representation of the firm's financial net worth, "as reported by D&B," was boldly presented as NET WORTH ($275,000) in the booklet. Little did many of the people reading through this booklet realize that an honest representation of deficit net worth was being presented by the parentheses around the number, which defined this as a negative number.

This firm later filed for bankruptcy protection and eventually went out of business, but not before bringing on an armful of suppliers to its projects. The creditors who made the greed-sale became the firm's proxy bankers.

The collection of such an account becomes the supplier's challenge. In order to do this, a firm needs to know the ABCs of the collection call and create a disciplined system for following through:

Plan your call

1. Was your company at fault?

2. Were any previous steps taken to secure payment?

3. Make sure you have the name of the person that can authorize payment.

4. Set up a scheduled payment program.

5. Prepare opening statement and fact finding questions.

Make your call

1. Identify yourself and your firm.

2. Give the reason for the call.

3. Make a strategic pause and listen to what the customer has to say.

4. Ask your fact-finding questions.

5. Suggest the payment program.

6. Overcome any objections.

7. Get a firm commitment.

8. Close your call.

Follow up your call

1. Record your notes.

2. Update your records.

3. Call back if no payment was made

JIM ULLERY is president of the Center For Organizational Energy LLC in Colonie.