How to Keep Credit Risks from Ruining Your Delaware Business

How to Keep Credit Risks from Ruining Your Delaware Business

How to Keep Credit Risks from Ruining Your Delaware Business

A credit risk is the risk that a client will default on their account and not pay you what you are owed. This is a huge concern for Delaware businesses. This is why it is important for you to learn how to keep credit risks from running your Delaware business. To do this, we use the 5 Cs of credit risk analysis.

Capacity to Repay

When it comes to extending a line of credit from your Delaware business, you must first examine the capacity that the client has to repay. How can you examine their capacity to repay? First, you should have them fill out a credit application. The credit application should include a signature area that makes them personally liable for the line of credit if the person signing is a business owner. You should also get a list of references and pull their credit. Pulling their credit is just one way that you can look at whether the client is paying on open accounts or if they have defaulted.

Capital in Your Business

To make sure that you offer an appropriate credit line and while evaluating whether they are a credit risk, you must look at the capital in your business. Would your business survive if the client defaulted on their account? It’s important that the amount of credit that you extend does not risk your entire business. Your capital is extremely important.

Collateral for the Credit Line

In the first point for capacity to repay, we touched briefly on how you should get a personal guarantee if the person signing is doing so on behalf of a business. Depending on how a business is formed, the owner of the business may not be liable for business debts if the business closes down. So, it’s important that you protect your Delaware business by getting that personal guarantee.

If your clients are individuals, make sure that you pull a credit report and check references. Collateral can mean a lien on certain property that the person owns if they fail to pay their credit line. Collateral is a great way to minimize credit risk.

Conditions of the Credit Line

It is important that the client understand the conditions of the credit line. For instance, if they  are late on a payment, will you revoke the rest of their credit line? Can they ask for extensions of extra credit? If so, what are the conditions they must meet to qualify for that?

Another condition is the health of your business. Can your Delaware business afford to take this credit risk?

Character of the Client

What is your impression of the client? This is more than just pulling their credit (although that can also be a good indicator of someone’s financial character). Trusting your gut when it comes to credit risks is important. Make sure that you check their references. In addition to finding out whether someone has a good financial payment history, you may also be able to hear hesitations in the voice of the references. This can make you think twice about whether you should extend credit.

Additionally, you could do a brief public records search to determine if the business or individual has a history of small claims or collections lawsuits against them.

Get Professional Help Limiting Your Credit Risk

For a limited time, Delaware businesses are eligible for a free process review from Clients ARM. With more than 30 years of experience, we can help your business refine the credit line process and minimize the effects that credit risks may have on your business. Call us today. We provide professional credit services for corporations, law firms, medical offices, and other businesses who need or want to offer a line of credit to their clients. Don’t wait – minimize the risks to your Delaware business by contacting Clients ARM now. Don’t forget to ask about our other valuable services.