Credit checking your customers and setting credit limits
Setting levels of customer credit
It may be difficult to determine the amount of credit to give - particularly with a potential or new customer.
You can therefore get a:
- credit check from a credit reference agency - see credit checking potential customers and credit checking new customers
- decision from a credit insurer
Alternatively, you could make the decision yourself and set a credit limit for each customer. You should set a customer's limit according to how good their credit rating is. If their credit rating is good, you could set the limit at double their monthly sales figure. The limit should be reduced for those customers with poorer credit ratings.
The limit will need reviewing as potential sales levels change. Make sure your staff are aware of each customer's credit limit.
You could also devise a simple system of risk codes to apply to each account, for example:
- A (low risk) - customers with the best credit references and payment records
- B (average)
- C (high risk) - those who your credit checks reveal have had, for example, county court judgments made against them and are therefore most likely to be slow payers
- N (new) - customers you have traded with for less than six months
Once you have identified your 'C' customers, it might be better to concentrate sales efforts on the 'A's and 'B's.
However, if you can't get enough business from 'A's and 'B's you might still have to take on some 'C' accounts - there may be good profit to be had from 'C's if you monitor them carefully and minimise your risks.
You should also ensure you review the system from time to time.