There has been much written lately about the
credit decision and setting credit limits but what about establishing
open credit for new businesses who are unable to meet all the
requirements of the three, four or five C’s of credit?
Selling to a new business on open terms is
similar to making an investment and the successful credit manager will
use the lessons of investing when deciding whether to extend credit to
a new business or not. Here are five basic rules to consider when
determining whether to sell to a start-up business on open terms:
REQUIRE A BUSINESS PLAN:
insist on seeing the business plan. Talk is easy - a business plan is
difficult. The business plan should provide enough detail to determine
whether the business is feasible and likely to succeed. The plan
should provide answers to the questions you should ask and make clear
how the business would make money and provide a return to its
Determine what the various outcomes might be. Under what circumstances
will the business succeed or fail? What must the business do to break
even? If the business needs more money will they be able to obtain it?
Are there sufficient assets to pay creditors if the business does not
WHAT IS THE BUSINESSES LEGAL STRUCTURE:
Is it a proprietorship, partnership, corporation, limited liability
company. If it is a corporation or LLC are the principals willing to
sign personal guarantees, including spouses?
DETERMINE IF THE PRINCIPALS HAVE SOMETHING TO
LOSE: Be leery of a new business where the founders/principals
have nothing to lose. If the principals will lose money or end up in
debt if the business fails then that fear of failure often is
sufficient enough motivation for them to make the business a success.
OBTAIN WRITTEN DOCUMENTATION:
Cover all-important aspects of agreements in writing. Never rely on
oral promises or general trust. It is easy for the principals or their
agents to “forget” specific arrangements that are not in writing.
If providing a significant amount of credit, it should be included in
the agreements that the customer will provide financial statements on
a regular basis.
DON’T SAY “YES” TO PREVENT THE COMPETITION
FROM MAKING THE SALE: According to the Small Business Administration,
seventy per-cent of all new businesses fail between years one and
three. If the founders/principals are reluctant to answer questions or
provide documents this is indication of Character, the most
important of the C’s of credit. Money should talk. The time to
obtain sufficient information, cooperation and written agreements is
before credit is granted. Always be prepared to “Just Say No.”
I wish you well.