Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she's here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea at email@example.com
We have an account that has been opened with us for a short period of time, about six months. The company was started slightly more than a year ago. Caving to pressure from my sales manager, I opened the account with a $20,000 line. The account is paying as agreed but they are constantly going over their credit line and my sales manager is pushing for a larger line—a MUCH larger line. According to him, we can sell this account quadruple what we are selling him if I would just increase the line. With no real history or references, how can I justify this?
Signed, Going Bananas in Boulder
What price missed opportunity? Everyone I know tells me how lucky I am that my job takes me to Las Vegas several times a year. But I’m not a gambler. In my job, I play with money all day, every day. Credit management and risk management is a game of chance. Open that account, have it take off, and years later—when it’s an outstanding, solid, well-paying account—you’re a hero. Take a chance on that same account and have it go down the tubes, taking a sizable chunk of your company's money with it, and you’re a grade A simpleton.
Being in charge of the company's largest asset and cash flow is not a game of chance, says you. Sure it is, says I. You are taking all the information—combining all the bank, trade, and financials (if or when you can get them) with credit reports and putting them into the proverbial blender, whirling it up to see how tasty the cocktail looks when you pour it out.
Of course, you could just say no. That path is clean, straightforward, and safe. No risk means no pain, but also no gain and no reward. You could be leaving lots of money on the table.
In the situation you have outlined above, dear Bananas, you are going to have to step way outside of the credit comfort zone. This is the kind of thing not covered in the "what to expect when you’re in credit" handbook. Speak directly to that company’s owner or president. In person is always preferred but a phone call works as well.
Have a very candid, very frank conversation. Have your questions ready so you are not wasting everyone's time and can make a decision on how your companies can work together so everyone knows exactly where they stand and what to expect. Make sure you answer these questions about the candidate:
- Do they have financials? Yes, I know they are newer company, so what is their banking relationship? Do they have a credit line? Loans? They had to give the bank something to get that money, right? ASK.
- How much of a credit line do they need on a monthly basis? Are you giving them extended terms? If so, why? Do they really need them? Additional terms means additional credit. At this point, they can't afford both.
- Can they do a cross-corporate guarantee from another company they own or have interest in? We’re talking about an entity that’s established. It can be for a specific period of time, long enough for them to establish a history with you.
- Personal guarantee(s)—are they willing to give them? Are they worth anything? Run their credit. At least you can see how they are paying in the personal life. Run an asset search. What do they own? I am a practical woman, so I want to know what is available if something goes horribly wrong.
- Can they do a letter of credit? Again, this can be for a specific period of time if they soften the pill.
- Can you use lien rights to secure each job? Yes, that means more work for you, and it doesn't mean unlimited credit. However, it does give you a way to sell them with another bite at the payment apple.
- Can you store the materials at your location and ship it out up to the amount you feel comfortable? This gives you control with ability to sell.
If none of these are good options for you, you may have to take that conversation and tell the owner straight up what your concerns are and that you have run out of possible solutions. What ideas do they have? If they have something to offer, awesome.
If that doesn’t work, you are back to gambling. You have to ask yourself—and ask your sales rep, too--what is the risk involved, and what's the reward? Can your company afford to take this gamble? Is it a weighted risk? What is the owner/management attitude at the company? Are they open to your conversation and concerns, or do they blow you off or, worse, ask for additional concessions? I always ask myself if there is a compelling reason not to do something. Then I proceed accordingly.
Credit will always have some element of chance or risk taking. Keep in mind the old Chinese proverb: If you must play, decide on three things at the start—the rules of the game, the stakes and the quitting time.