Are Your Customers a High Credit Risk? Act Like a Factor

I recently read the All Business posting which suggested that about 25 percent of companies are either very high or high credit risks. If you’re selling your product to other businesses, how should you decide how to extend open credit terms to those customers? Would your business survive if 25 percent of your customers didn’t pay its invoices?

Whether you’re borrowing from a bank or selling your accounts receivable to a factor, you need to act just like the lender in determining to which companies you’re going to provide open credit terms. Either funding source could declare your customer to be too risky and thus deny your ability to borrow against or sell that specific receivable potentially strangling your working capital.

So why should you act like a factor?

At the end of the day, a factor is the only funding source that bases its decisions primarily (if not solely) on the creditworthiness of your clients. If the factor won’t buy the receivable, you should think long and hard about extending open terms to that customer.

One factor that specializes in providing financing to companies needing up to $1 million line of credit told me that his decision to purchase your accounts receivable for a specific customer is an art and not a science. The decision will be based upon a variety of factors including the customer’s Dunn and Bradstreet scores, track record of paying other vendors, business acumen, and general integrity. This factor looks upon FICO scores as more of a character reference than as a key consideration.

If you factor your receivables, you can often work closely with your funding source to pre-screen which accounts receivable they are willing to buy. In effect, they can be your free outsourced credit department. By the way, this is a huge benefit of using factoring for those who think the cost is too high.

So if you can’t afford to not collect on 25 percent of your revenues, act like a factor!

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Related Tags: All Business, factoring, accounts receivable, small business, bank loans, invoice funding, working capital, cash flow, prime rate