How to fine-tune a credit policy.

• Author: Wilford, Thomas

As banks react to a sluggish economy and increased loan losses, even healthy middle-market businesses are finding it tough to obtain financing. At the same time, even the owner of a growing business is faced with the challenge of protecting the company from financial problems his or her customers may be experiencing. Although a business owner may have to select which customers to keep and which to refuse credit to, there are other ways to improve management of your customer base during tight-money periods.

For example, extending credit enables a company to retain key customers, paves the way for future price increases and gains for the business a competitive advantage over vulnerable competitors. Shortening credit, on the other hand, helps preserve the company's capital and protect it from the tough times ahead.

The proper balance of credit differs from one customer to the next -- and may even change from one month to the next. Changes in conditions of each customer and in the business continually must be monitored so that informed credit decisions can be made.

The first step in evaluating credit policy should be to collect as much information as possible on the credit and capital requirements of customers and competitors. This can help a business owner determine if the credit terms the company currently is using need to be changed. Of course, the company's capital requirements are an important part of the puzzle.

Sales and marketing personnel often are the best sources of credit and capital information outside the company. Being on the front lines, they know when competitors are offering better credit terms and when they are getting tough with late payers. If properly trained to gather information, sales people can get a good handle on their customers' financial conditions and credit concerns.

The types of business the firm's customers are in and the geographic areas in which they operate also should be examined. At any given time, different industries are in various business cycles, and the availability of credit is rarely uniform in all parts of the economy.

For example, companies that manufacture windows for the new home market may have a customer base with credit problems when the housing market is weak. But because home-improvement sales usually expand in times of poor housing markets, companies that make products for the retail home-improvement market may see the quality of customer credit improve.

As soon as a company discovers...