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Credit, Credit Everywhere…

Posted on September 18, 2008 by Bob Bernstein

“Credit” is the topic of so many discussions these days.  From the $85 billion “loan” the US is giving AIG to the effect the credit “markets” have on business, to the impact of the mortgage (credit) crisis.

An area getting less focus (and more deserving of attention) is the importance of credit granting practices of businesses.  From micro-business to multi-national, businesses must be looking more carefully at their lending policies now.  I say “lending,” because your selling on credit is making a loan to your customer.  If it wasn’t you making the loan, the customer would have to go to a bank or other lender.

On the one hand, it is a matter of how well the borrower can handle the credit (cash flow, assets, business plan, etc.).  On the other hand, how well can the lender/seller can handle the loan?  What is the credit availability for the business to meet its obligations?  What is the profit margin on the sale as compared to the expected repayment terms.  In my book, Get P.A.I.D. A Guide to Getting Paid Faster, I talk about the “The Payment Gap” and the “Red Zone.”

The Payment Gap is the time it takes the customer to pay, measured from the sale.  If your costs of credit extension (Finance costs, Opportunity costs, Collection costs, Relationship costs, Replacement costs) are too great and if your customer is delinquent, it can not only eat into your profit, but can eat up your profit.  At that point, you would have been better off not making the sale in the first place.

My point is that too many businesses don’t think enough about making the right sale (from a credit perspective) and just think about making any sale!

Today, more than any time in the last 20 years, owners and managers must think about these issues and, more importantly, do something about how their business goes about the business of extending credit.

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