STEPS TO OBTAINING CREDIT APPROVALS FROM LENDERS
Many businesses must rely on loans or other forms of credit to finance day to day purchases or long-term investments in facilities and equipment. Credit is one of the foundations of the any economy, and businesses must obtain credit in order to compete. To establish credentials for any credit approval process, from short-term loans to equity funding, businesses need to have a business plan and a good credit history. The company must be able to show that it can repay the loan at the established interest rate. It must also demonstrate that the outlook for its type of business supports planned future projects and the reasons for borrowing.
In applying for credit, business owners should realize that potential creditors (whether banks, vendors, or investors) will seek to evaluate both their ability and willingness to pay the amount owed. This means that the creditor will examine the character of the borrower as well as his or her ability to run a successful business. Creditors will also look at the size of the loan needed, the company’s purpose in obtaining funds, and the means of repayment. Ideally, lenders evaluating a business for credit approval like to see up to date books and business records, a large customer base, a history of prompt payment of obligations, and adequate insurance coverage.
Granting Credit Approval to Customers
Credit approval is also something that a business is likely to provide for its customers, whether those customers are primarily individual customers or other businesses. Experts recommend that businesses develop credit policies that are consistent with the overall company goals. In other words, a company’s approach towards extending credit should be as conservative as its approach toward other business activities. While granting credit to customers can offer businesses a number of advantages, and in fact a necessary arrangement for many types of business enterprises, it also involves risks.
Some of the disadvantages of providing customers with credit include increasing the cost of operations and tying up capital that could be used elsewhere. There is also the risk of incurring losses due to non-repayment, and of eroding cash flow to an extent that requires borrowing. But granting credit does offer the advantage of creating a strong base of regular customers. In addition, credit applications provide important information about these customers that can be used in mailing lists and promotional activities. In the retail trade, furthermore, credit purchasers have proven to be less concerned with prices and inclined to buy more goods at one time.
When developing credit policies, businesses must consider the costs involved in granting credit and the impact allowing credit purchases have on cash flow. Before beginning to grant credit to customers, companies need to be sure that they can maintain enough working capital to pay operating expenses while carrying accounts receivable.
If a business does decide to grant credit, it should not merely adopt the policies that are typical of its industry. Blindly using the same credit policies as competitors does not offer business any advantage, and can even prove harmful if the company’s situation is atypical. Instead, businesses should develop a detailed credit policy that is compatible with their long-term goals.
The decision about whether to grant credit to a certain customer must be evaluated on a case by case basis. Each business that grapples with this issue needs to gather and evaluate financial information, decide whether to grant credit and if so how much, and communicate the decision to the customer in a timely manner. At the minimum, the information gathered about a credit application should include their name and address, bank and other trade references, employment and income information (for individuals), and financial statements (for companies). The goal is to form an assessment of the character, reputation, financial situation, and collateral circumstances of the applicant.
CREDIT PROGRAMS FOR BUSINESS CUSTOMERS
There are many avenues available to businesses for gathering information about credit applicants. In the case of business customers, a business’s sales force can often collect trade references and financial statements from potential customers. The business can also contact local attorneys to find out about liens, claims, or actions pending against the applicant, and can hire independent accountants to verify financial information. An analysis of a company’s debts, assets and investments can provide a solid picture of its credit worthiness, particularly when the data is compared to a composite of companies of similar industries. It is important to note that all information gathered in the credit approval process should be held strictly confidential.
CREDIT PROGRAMS FOR INDIVIDUAL CONSUMERS
Consumer credit bureaus can provide a useful resource for businesses in evaluating the credit worthiness of individual customers. These bureaus maintain records of customers’ experiences with banks, retailers, hospitals, financial companies, automobile dealers, etc. They are able to provide this information in the form of a computerized credit report often with a weighed score. Still, credit bureau reports do have some potential for error, so businesses should not necessarily use them as the only source of customer credit information.
A common type of consumer credit is an installment plan, which is commonly offered by sellers of durable goods such as furniture or appliances. After credit approval, the customer makes a down payment and takes delivery of the merchandise, then makes monthly repayments to pay off the balance. The down payment must always be large enough to make the purchaser feel like an owner rather than a renter, and the payments should be timed so that the item is paid off at a faster rate than it is likely to depreciate from use. The merchandise acts as collateral and can be repossessed in the case of nonpayment. Although installment plans can tie up a business’s capital for a relatively long period of time, it is possible to transfer such contracts to a sales finance company for cash.
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