Extending Credit to a Small to Medium Enterprise (SME)
Three Things to Understand About Their Business Plan
The recent volatility in our economy has been rough on small and medium-sized companies. It has made evaluating their creditworthiness and setting reasonable credit lines even more complicated. In addition to current issues, you should consider the foundational elements the business is built on. When reviewing the creditworthiness of an SME, particularly a startup business, consider the thoroughness and credibility of their business plan. Analyze it and ask the necessary questions.
To be truly successful, a business owner needs to understand and be able to articulate the following crucial elements of their business plan in clear, understandable terms:
- What is the product or service?
- What is the industry served?
- What is the target market?
Evaluating the sustainability and competitiveness of a Product or Service
A new business should focus on its core products and services. Beware of a company diluting its resources by trying to be all things to all customers. A successful business will demonstrate a distinctive advantage over its competitors. Look for a unique product, a cost advantage, technical competence, or something else that will significantly benefit their customers.
Understand the Industry Dynamics and What it Takes to be a New Entrant Among Competitors
There should be a clear definition of the industry. Look for an industry with growth potential. Is there room for new entrants with innovative offerings? Does the business plan realistically anticipate the costs, expertise, and infrastructure needed to compete?
Does the Target Market Have the Capacity to Bring the Expected Results?
The business plan must demonstrate the target market is substantial enough to deliver the expected revenue and profit objectives. Before deciding to approve a credit line, determine that the company's financial resources are adequate to reach the target market on a scale needed for success. What will it take in terms of sales staff, marketing and advertising expense, and social media presence to meet the stated objectives?
Conclusion
Credit Managers have to evaluate many aspects of a customer's business to determine creditworthiness. Reviewing a newer company becomes even more complex, particularly in today's volatile economy. There may be little history to support financial, or supplier payment trend analysis. Start by evaluating the company's business plan. Understand the management team. Do the products and services offer a unique competitive advantage? Do the target industry and customer support revenue and profit objectives? All this should be available in plain, understandable language. If not, dig deeper.
Watch this course The Small Business Reorganization Act: What it Means to the Credit Grantor to learn about the latest revisions made in SBRA and how to secure your receivables while dealing with small businesses.
