LENDING
IS IT TIME TO RE-ASSESS YOUR CREDIT POLICY?
Read the headlines and it seems everyone – from mortgage lenders to global banks to the Federal Government – is reassessing their lending policies. Credit operations – even for smaller businesses - should be a fluid process that is regularly re-evaluated against the internal and externals forces acting upon your company.
Here are a few ideas to keep in mind as you evaluate your own credit policies.
Easy Approvals May Indicated Missed Opportunities
If every credit report for every customer comes back high, you’re pretty happy right? Sure, it means your borrowers are likely to make payments. But it may also mean you’re missing other potential customers. If you only attract people able to easily get credit, you're capturing just a portion of the available marketplace. A reasonable range in credit report scores may mean you have a broader (and larger) customer base coming through your doors.
Having Some Delinquency Is A Good Sign
It's easy to be debt-averse and it seems logical that a business might want to have all of its borrowers pay on time, every time. But if all of your borrowers make every payment, it may be a sign that your credit policy is too tight and you’re turning away potential customers. Some delinquency in payments is a natural part (and cost) of doing business. To reach the most customers you want a policy that accepts the most customers possible while exposing you to just the right amount of risk.
Regular Updates Can Make Risk Less Risky
It's true, to grow your business, you may want to take on some credit-risk. But by regularly auditing and updating the information of your open accounts, you improve the odds of quickly collecting should an account default on payment. Regularly updating customer billing information and closely monitoring payment behaviors for early signs of trouble can help you pre-emptive approach at-risk accounts with remedies to help them make payments.
Fraud is not Credit Risk, its Fraud.
Sometimes businesses mistakenly treat fraud as credit risk. Criminals may apply for credit using stolen information. When loans based on this stolen identity go into default, the lending company winds up chasing the identity-theft victim and not the criminal who made off with the loan under false pretenses. Validating your credit applicant's information at the time they apply is an easy way to confirm that risk is risk, and not fraud.
In Terms of Issuing Credit, Small Businesses Need To Act Big
Big businesses tend to have a disciplined approach to issuing credit. They always vet their customers. And they make use of numerous, sophisticated tools and resources for background checks, application validation and decisioning. Not surprisingly, large businesses do not attract the costly serial bad debtors that small businesses do.
Today the same tools used by large businesses are also available to smaller businesses. By taking a pro-active approach, and regularly revisiting your company’s lending policies you can open your business to greater revenue while managing risk and reducing costs associated with collections.
Even local businesses have much to gain by acting like global enterprises.
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