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Can you sell to every debtor?

The purpose of effective credit management is to achieve the maximum possible outstanding for the shortest possible period of time. This is easier said than done when getting new business is tough, only for credit to refuse the account – and especially frustrating in a depressed economy where growth is hard to achieve. No wonder some sales sceptics refer to the credit team as the “sales prevention department”.

This then begs the question: “can you sell to every debtor applying for credit?”. Of course the short answer is “no”. Debtors with judgments; adverse, weak financial position or new established businesses are deemed as very high risk and should best be avoided unless supported by some form of security. Of all the applications which Debtsource process these high risk debtors form approximately 5% of the total assessed on average. Sell to these debtors without any form of security and disaster is sure to strike. Indicators such as judgments are extremely predictive in terms of potential future loss, which is why these debtors are best avoided.

Beyond this 5% lies a further risk section – approximately a further 5% to 10% of all trade credit applicants on average – where if correctly approached there may be opportunity for profitable credit business. These include businesses where there may be some minor form of adverse, or the financial statements look weak, or where there simply is not enough information to effectively assess the risk within the usual timelines of the expected account opening responses.

This group of debtors represents a real dilemma to most businesses. If these debtors are simply declined it would mean that a large portion of potential new applicants will not become profitable customers. Remember that one declined credit limit of say R 1 million effectively means annual lost sales of R 6 million, or lost gross profit of R 1,2 million per annum (based on a 20% gross margin). Conversely, if all these accounts were to be approved “blindly” the risk could be too high and translate into unacceptable bad debt levels.

The question then remains as to how to assess this section of debtors. To be clear, these are debtors whom do not have significant judgments or adverse recorded against them, but similarly do not on face value qualify for the credit facility they have applied for. These debtors clearly require a different approach if profitable sales are to be had.

One of the most successful techniques used in separating these risks into approves and declines is the good old fashioned personal visit. Recommended only for larger limit applications (R500 000 plus) a credit specialist can glean an enormous amount of information from an on-site assessment. Companies are usually eager to promote themselves on such contact, and are far more forthcoming in releasing financial information, explaining business challenges and opportunities for growth. The
seasoned credit specialist can quickly assess whether the business will be an acceptable risk or not. Such visits can be especially crucial in an export environment where the debtor is situated in a country which does not operate a credit bureau and where the gross profit yield is sufficient to justify the visit.

Debtsource recently launched an independent review process on all declined limits, in which larger limits are selected for personal visits, with client authorisation. As part of the review process we consider every possible credit option to make the facility possible, but ultimately may recommend keeping the client on a COD basis, entirely dependent on the circumstances surrounding the company assessed. If, however we are able to recommend a facility, the usual Debtsource limit guarantee will apply, and if you use credit insurance we are also able to motivate the limit to your insurer, on the understanding that the insurer is at liberty to make their own independent decision. Clients are also welcome to request personal visits on demand on either new customers or existing debtors. The cost for the service varies according to where the debtor is located, but generally is a very sound investment considering what the potential long-term return may be.
Debtsource uses only highly skilled and experienced credit specialists to fulfil this role, and backed by our in-house research team are able to recommend the best decision for your business. If you have large debtors where credit risk is of concern, this is an ideal mitigation tool for peace of mind. E-mail us on info@debtsource.co.za