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In this uncertain business environment, a previously valued customer, or a new applicant may be determined to be too high risk for a credit line on open account terms. Based on your company's credit policy the credit line requested cannot be approved unless the terms provide some assurance of payment. As we all know, you as a credit manager are tasked with finding ways to enable profitable revenue for your company. Turning away business is the last resort.
Every credit manager should have ready options to set up a reasonable business relationship in a way that mitigates the perceived credit risk.
As the old saying goes, “Never say no, say yes, but how?” The conditions required may be unacceptable to the customer, or the applicant, but that is their choice. Your job is to provide reasonable options that both protect the company and offer realistic ways to meet the customer's needs.
Here are some suggestions:
1. Some form of Advance Payment, unless paid in cash, requiring good funds on deposit before shipment, or order for custom product:
a. Cash in Advance (CIA) In advance of an order being booked or a shipment
b. Cash on Delivery (COD)
c. Advance partial payment, or partial payment on delivery
2. Specialized Terms
a. Shortened terms
b. Milestone or progressive payments
c. Pay previous shipment before a new shipment is released
3. An Acceptable Guarantee
a. Personal Guarantee
b. Corporate Guarantee
c. Cross-Corporate Guarantee
4. UCC Security Interest
a. Purchase Money Security Interest
b. Blanket Security Interest: A tool that could be used by a major supplier willing to subordinate to the customer's primary lender.
5. Documentary Credit
a. Standby letter of credit
b. Documentary Credit
c. Sight draft
d. Time draft
These are options that should be considered and if appropriate for your company, included in the Credit Policy. If you are looking for more details on how to do portfolio analysis during the economic downturn and tweak your credit policy, here's a course on the topic.
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