Credit: Extend or not to extend?

With the financial markets in turmoil, customer credit has become a big issue. Should your shop extend customers an open account or tighten terms and risk not getting some jobs? Today, more than at any other time in my working career, shops must carefully consider this question.

Most shops can’t finance a customer’s operation, particularly large customers. However, a shop may find itself without much work if it can’t figure out a way to provide some sort of credit.

So, what steps can a shop take to minimize the risk and ensure timely payments? I’ve found that meeting with a customer’s accounts payable manager or another official is beneficial because you can better evaluate the situation when face-to-face. But if a customer isn’t within a reasonable driving distance, other measures are necessary. These include acquiring a new debt and balance report, conducting an updated credit reference check or speaking with management on the phone. Better yet, contact the customer’s bank and request account information. These measures aren’t 100 percent foolproof, but you’ll generally have a better understanding of whether a customer or prospect is financially viable.

What if your research doesn’t reveal a credit risk, but you’re still not comfortable offering open account terms? Then follow your gut instinct and don’t. The downside is you risk upsetting the customer and losing the work. It’s a fine line only you can determine.

How about requiring a down payment to ensure raw materials are covered and granting open terms on the order balance? If you don’t maintain timely payments to your own suppliers, you’ll be low on the priority list for essential raw materials.