Five Things to Know When Extending Credit

5 C's of Credit

From the Front Line:  Five Things to Know When Extending Credit

Kelly Cronan

We all have technology and tools to help us with just about everything in life.  When it comes to credit decisions, even though there are tools that can help us, good credit decisions are still the result of making an assessment of a situation with limited information and a short amount of time.  You may recall the 5 C’s of Credit from your credit management training.

The 5 C’s of Credit

Capacity:  Does my customer have the ability to generate enough cash flow to run their business and repay me for products/services I sold them?  Don’t get caught up in appearances.  Just because the owner drives a flashy car or lives in a pricey home doesn’t mean they have the capacity to repay you.  Check their financials whenever possible.

Conditions:  What are the economic conditions surrounding my customer and his/her business model?  Are they in an industry that is doing well or are they in an industry that is under duress?  What’s their niche within their industry and are they poised to do well in the future?  Even though home builders appeared to be doing well in 2007, in 2008 too many creditors found out how much risk they had in their portfolios.

Collateral:  Is it possible for me to gain collateral as a result of my transaction with my customer?  Let’s face it: with most B2B transactions, you are selling on net terms.  Taking a security interest in the goods isn’t practical.  In fact, it could cause a revolt in your sales department.   Instead, you may require that your customer sign a guaranty.  It’s not the same thing as collateral, but it could give you more leverage over another creditor should the company default.

Credit:  Look at the D&B, Experian, or even a consumer credit report.  How do they pay other vendors?  If this is a new customer, do they have references you can check?  Are they a former customer for which you may already have a history?  Past performance is generally an indicator of future results!

Character:  What kind of reputation does the customer have?  Make sure you separate fact from fiction.  Are there suits and judgments in the customer’s history?  Do creditors need to sue to get paid?  If your potential customer has a poor reputation, then perhaps you’ll be better off selling cash in advance.

It’s easy to imagine a minefield when making credit decisions.  At every turn there are risks.  We never have all the facts.  If credit people had access to all the facts we would all be replaced with computer programs.  The truth is, it takes people to sort through commercial credit applications and arrive at sound decisions.  Don’t be afraid to take the risk, just calculate the risk you take.

Kelly Cronan is the Vice President of Collection Operations.  Kelly can be reached at 763 315 9660 and his email is