As he has expressed before, think of setting up credit lines as if they were credit cards. If credit card company will give you credit, they may say it’s unlimited, but it’s based on ability to pay back/creditworthiness. Base credit line on creditworthiness and not the degree of their need of your services.
Separate client companies into different classes. Class A companies would be big/publicly traded companies, such as Coca Cola, who would typically never have a credit problem, though they may have temporary cash flow issues. Class B companies are large regional companies, such as Kroger, which you may want to check their credit once per year, but otherwise don’t put them under a microscope too much because they shouldn’t be an issue. Class C companies are private companies, typically owned by one or two individuals or a family, which you may want to check their credit every 6 months or so because everything is more fluid for them. They may lose 1 client that is 70% of their business, which would have a huge impact on their creditworthiness, or a couple that owns the company gets divorced and they have to buy each other out, leaving the company cash-strapped, or the company is passed down from a parent to a child who doesn’t have the same skill set as the parent.
A good standard to adopt when checking credit is to check with the bank of the company applying for credit and 3 trade creditors provided by the company. These 3 trade creditors will typically be the better clients/vendors whom they regularly pay on time and typically have good things to say, but if for some reason they don’t, that is a red flag right there.
Assuming the company applying for credit has credit lines with these other trade creditors for amounts of say $10k, $8k, $5k, it is generally a good idea to consider offering a line of credit in the middle of that range. Check their bank’s rating for their company account to balance it against the credit line they’re asking for. The banks will let you know how many figures they have available, 4 figures would equal a minimum of $1000, 5 figures would equal a minimum of $10,000, so on and so forth. It is not a good idea to extend a credit line that is much larger than the rating on their bank account, such as giving a $20,000 line of credit to a company that has roughly $5,000 in the bank. Save the credit application. It is a common mistake to check a company’s credit at the onset and then forget to re-check again for a long time, until it’s too late. It is much more likely to catch warning signs of a company not being able to pay on a credit line if you check their credit regularly.
AER has a credit reporting product available called Credit Screen, which checks institutional creditors, tax liens lawsuits and things along those lines. Visit our website at www.staffingdebt.com for more information related to Credit Screen. Any further questions can be directed at 800-452-5287, extension 6578.