May’s Challenge: What Would You Do?
Typically, PICB will tell a tale of woe to make a point or to explain a principal, but this month we are going to challenge our readers with the everyday question credit managers, business owners, and financial folks face…… the dreaded: “Should we?”
When does risk become too great to warrant terms? Here is May’s challenge:
Your company established a credit reserve equal to 1.5% of sales and so far this year you have not incurred any losses. Remember, no loss is just as unhealthy to growth as too much, and without risk, there is no reward.
Today you are presented with 3 new credit applications and the applicants combined exceed your reserve. You can only afford terms to 2 of the 3 or partial terms to all 3 customers. All 3 applicants have an average score.
Keep in mind, the majority of customers score average with regard to credit, and it is those customers who present the best potential for profit and growth. Average customers provide upside potential because they are not large enough to dictate, prices, but they are stable enough to pose a minimum risk of absolute loss.
Here are your applicants:
Applicant 1 is a broker operating as a home/residentially based corporation and has been established for 15 years as an entity. The entity does not have any liens or negative reports but was previously a slow-pay customer during his known slow time.
Applicant 2 is also a corporation and sells tools from 3 locations (all in one state). The property is owned by the president of the corporation and is not owned by the corporate entity. The company is 40 years old, has 10 liens, 2 are banks, but none are tax liens. The company has 3 lawsuits older than 5 years all relating to noncontract transactions
Applicant 3 is an internet start-up, but it’s principals are a well-known Internet company specializing in .com’s. It is less than 5 years old, but there is evidence of a large capital investment from a venture group that is the only secured lender. There are no negative reports, including no lawsuits.
So who gets what and why?
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