| This paper defines the procedures you should | | | | solid company, or a small company that might not |
| have in place for the credit checking/granting | | | | be in business next week? Is this company one |
| process. These are the first steps that must be | | | | that tends to keep its employees, or are there |
| taken on every credit decision. | | | | regular layoffs? Is the company in an industry |
| The Purpose of a Credit Evaluation | | | | that is seasonal, such as construction? |
| There are two reasons for gathering and | | | | - What is the applicant's position? Is it the |
| evaluating credit information. | | | | presidency, or an entry-level position? Or, is it in |
| - To determine if the applicant can pay the | | | | the middle somewhere? Business executives are |
| account within your company's terms | | | | considered one of the soundest credit risks. The |
| - To determine if the applicant will pay the | | | | reason is that they have an image to present to |
| account within your company's terms | | | | both the outside world and their corporation. |
| During the credit checking and credit granting | | | | Income - Income is always an important |
| process your department should perform the | | | | consideration. Whether you deal with consumers |
| following tasks: | | | | or commercial accounts, you must determine that |
| 1. Gathering Credit Information | | | | the applicant has sufficient income to pay on the |
| You must use a standard format for collecting | | | | debt. |
| credit in-formation. Most companies give a credit | | | | Current Obligations - The current obligations that |
| application form to the applicant to fill in relevant | | | | an applicant has directly affects the chances for |
| credit data. | | | | repayment on a timely basis. |
| Account Types | | | | Payment History - The applicant's payment |
| There are three types of credit accounts for | | | | history gives you the answer to the second |
| which you may be responsible. You may deal with | | | | question in the credit analysis process, "Will the |
| all three, or a combination. | | | | customer pay the account within terms?" This |
| The Consumer | | | | answer is deduced from the person's, or |
| Consumers are individuals who request credit to | | | | company's, payment history. |
| buy personal items. These are non-business | | | | Bank References - The bank accounts listed on |
| related products. You need to get the full name | | | | the credit application show the type of bank |
| and address of all the persons relevant to a credit | | | | accounts and the current balance. You should |
| application. | | | | attempt to get all bank information if possible. |
| Commercial | | | | Your Product's Effect on Monthly Obligations - |
| Commercial accounts are businesses buying your | | | | This is a consideration for commercial customers. |
| product for use in their business. There are three | | | | Many companies sell products that help their |
| categories of normal business accounts. | | | | customers increase revenue or cut expenses. If |
| Proprietors are business owners who have solely | | | | your company's products are in this category, |
| owned businesses. In most cases you want to | | | | you need to carefully consider the product's |
| get both the business credit information and the | | | | impact on the applicant when you are making |
| personal credit information. The exception might | | | | your credit decision. |
| be for a large solely owned business. | | | | 3. Setting a Credit Limit |
| 2. Evaluating Credit Information | | | | A credit limit is the dollar amount of your product |
| The amount of time that you spend checking | | | | or service you will agree to provide a customer, |
| credit information must be related to the amount | | | | within a specified period (generally a month), |
| of credit being requested. In some cases your | | | | without reviewing his credit history or requiring |
| credit items will be so small that it isn't even | | | | cash payment. |
| worth spending any time clearing credit. | | | | The company will establish its own credit limit |
| One example for this type of situation is the local | | | | policy. Shown below are the parameters that |
| newspaper. The home delivery fee is not the | | | | have been established by one small business |
| major source of revenue for this business. | | | | services company as the basis for establishing |
| Advertising is the main source of revenue, and | | | | credit limits. If the company uses a similar |
| copies delivered establishes the advertising rate. | | | | schedule, the following parameters might be |
| The monthly fee for delivery is very small in | | | | minimum conditions for each indicated credit limit: |
| comparison to the revenue received from ads. | | | | - $50 limit. Must have a bank account which has |
| Now you may say, "But the delivery is generally | | | | been open at least six months. Must have |
| collected by a young paper carrier," and you are | | | | maintained a high 2 (from $60 to $99) balance |
| correct. But what about newspapers that bill the | | | | with no returned checks. Must have no bad |
| customers directly. This is one example of a | | | | information listed in a credit bureau history file. |
| situation where no "up front" checking is done. | | | | - $100 limit. Bank account-one year, low 3 rating, |
| There are very few of these types of | | | | no bad checks, no bad credit history. |
| businesses. | | | | - $200 limit. Bank account-one year, low 3 rating, |
| You should consider the following information | | | | no bad checks, satisfactory credit history of one |
| when you make your credit evaluation. | | | | year with two other firms, high credit of at least |
| Length of Time in Business/Buying on Credit -- | | | | $150. |
| The time that a person has been using credit, or | | | | - $500 limit. Bank account-two years, med 3 |
| that a company has been in business, is important. | | | | rating, no bad checks, satisfactory credit history |
| Stability is the key here. Older, more established | | | | of two to three years with at least two other |
| individuals or companies who have used their | | | | firms, high credit rating of at least $350. |
| credit wisely and paid their bills on a timely basis, | | | | - $750 limit. Bank account-three to five years, |
| should be considered for a higher credit line. | | | | high 3 rating, no bad checks, or, bank account-one |
| Last Date File Was Updated -- The age of the | | | | to two years, low 4 rating, no bad checks, |
| credit information is important. If you find that a | | | | satisfactory credit history of three to five years |
| credit file at the credit bureau is more than a | | | | with four other firms, high credit limit of at least |
| year old, have it updated. It is easy for an | | | | $500. |
| individual or company to go from excellent credit | | | | - $1,000 limit. Bank account-three to five years, |
| status to marginal in less than a year. | | | | med 4 rating, no bad checks, or, bank |
| Type of Business or Employment -- The type of | | | | account-one to two years, high 4 rating, no bad |
| business for a commercial account, and the | | | | checks, satisfactory credit history over five |
| employment of a consumer, are closely related | | | | years, high credit limit of at least $1,000. |
| when considering an applicant for credit. | | | | - Above $1000, or unlimited. All major companies, |
| The type of business is very important when you | | | | all government agencies, any company with a |
| deal with commercial accounts. You should | | | | stable business history over five years that the |
| consider the following points: | | | | credit manager or a company official considers a |
| - Trends of the company's industry sector | | | | good risk. |
| - Trends of the company's industry sector | | | | If the credit manager decides to grant a |
| - A mainstream company or a unique company | | | | customer a credit limit outside the guidelines |
| The type of employment is a strong consideration | | | | established by the company, he or she should |
| in granting credit. You should consider the following | | | | document the reasons on the back of the credit |
| items: | | | | application. |
| - Where does the applicant work? Is it a large | | | | |