Creditors' Rights 23
Q: What is the best way to
establish a credit policy and
credit lines?
A: Most companies use one of
two policies in determining credit
lines. One approach hinges on an
in-depth investigation that
involves obtaining business and
bank references, reviewing credit
applications for consistency with
other information sources, and
retrieving financial statements or credit bureau reports. The more
you can learn about the customer, the better educated you'll be on
whether the customer is creditworthy. The other approach is to
conduct a cursory review, grant a small credit line and review the
decision after a few months of experience. In either case, the credit
pot can be sweetened with negotiations regarding credit limits.
When it comes to actually “doing the math,” there are two 10 percent
rules that coexist and that should be considered in credit limit
calculations. First, the upper limit on credit should be no higher
than 10 percent of the customer’s net worth. When a customer is a
large business, the first rule can create an uncomfortably high ceiling.
That’s why the second rule tempers the first: no one customer
should account for more than 10 percent of the credit-granting
company’s annual business. Crunch the numbers and use your
best judgment...keeping in mind that new businesses can often
obtain $50,000 credit limits from some credit card issuers.
