So now you have a new customer!
So now you have a new customer, congratulations! You or your sales person has now taken an order; you have not necessarily made a sale because a sale isn’t a sale until the invoice has been paid. Which beings us to the point, especially if your company is being asked to extend credit terms, how do you know that your new customer is going to pay or pay within the terms that you set? If your company is going to extend credit terms, you should develop a credit application which your customer should fill out in detail and sign! (Many large businesses already have a form, just ask them to attach the form and sign your credit application).
If you don’t have one-you can get one here.
There are some things you need to add, most importantly is a bank reference and a Dun’s number.
A bank check allows your business to talk with your potential client’s banker. This form will need to be signed by a company officer, not merely a purchasing agent or buyer. This form should include the checking account balance, long term notes or loans, and/or a revolving credit facility (and how much is being used at this time). Unfortunately, bank checks are becoming more difficult to do and some banks are insisting that they will only do this with other banks, so you may have to get your banker to do this for you.
If you are given a Dun’s number, your customer is expecting you to run a Dun and Bradstreet report (this is called the Business Information Report, D & B insiders call it a BIR (like beer)). This is great information (usually) but do you know how to read the report? Here is what to look for (without becoming a Commercial Credit Analyst) without going through it in fine detail. At the top of the report, the BIR will list the address and contact numbers-verify them-this means CALL THEM! Next it will list the year the business started, how many employees, last financial date (which might be blank), net worth (which could negative-warning sign), Sales, and History. History is important, it can be clear (this is what you want), business (which means that there has been a business failure in the past by one of the businesses principles), or personal (there has been a personal financial failure in a principles past). Also there will be financing which will either be secured (this means a bank or banks, or a entity holding a senior debt instrument (like a corporate bond) take precedence over trade credit-what your company is being asked to grant), unsecured, or both
Also at the top will be a number called a PAYDEX. This is a measure that Dun & Bradstreet developed to measure how promptly a business pays. A rating of 80 is pays on time. D & B will also give you the trend: toward promptness or tardiness.
D & B will also show all the trade reporting and you can see for yourself if the company is paying on time. If D & B has a financial statement it will give the Current and Quick ratios which measure the ability to turn assets into cash (these should be 2:1 and 1:1 respectively).
So if the PAYDEX is close to 80, Current & Quick ratios are in line, trade reporting is mostly solid, and the bank and references checks look good, your business stands a good chance of being paid, and paid mostly on time for the invoices that you send to your new customer.
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