How do you know what credit limit to give your clients?

Key clients collapsing is one of the most common ways for businesses to become insolvent.

In some industries putting up considerable amounts of money before getting paid is standard, and in most industries there is some degree of investment before getting paid. Creating sensible credit limits for clients is essential for every business.

At Red Flag Alert we use current data to give you insights on sensible credit limits to offer clients but it’s important you have an internal framework to approach these decisions with because it’s never a straightforward decision. 

Broadly there are two ways to assess a client: The Legal and Financial Case, and the Business Case. These two approaches often conflict.

The Legal and Financial Case

• Financial accounts: is the company solvent, liquid and generally looking financially secure?
• Director history: reviewing the backgrounds of the key people in the business to check they haven’t got a history of bad behaviour.
• Insurances and relevant qualifications: has the business got the correct framework in place?
• References: how has the client worked with key suppliers in the past? Try to reference as widely as possible and ask searching questions, referring directly to payments and creditworthiness.
• Reputation: are they established in the market?
• Previous experience with the client.

 Business Case

This looks at the importance of this client and should include:

• Potential revenues from this client: consider what proportion of revenues this client may account for in your business.
• Other potential benefits of using the client: will they provide credibility to sell to bigger clients or in more lucrative markets?
• How much you need this client: how does the business look without this key account?

Final Decision

Once you’ve assessed these factors then you need to make a decision in the credit terms to offer. Start with typical industry credit terms for clients of their size and work from there. Start by considering how much you need the client and how much they need you. The greater your need and weaker your position the more you are likely to offer favourable terms but this should be treated as a negotiation. You should do two things - set terms which are as favourable as possible without being unrealistic, and then back up your value. Re-enforce the value you bring as a client and give narrative around the payment terms. 

“Our payment terms are 30 days. For this you get a 14 day money back guarantee, free returns and 24/7 customer support. These terms allow us to run our business efficiently and provide you with the best possible service” 

Finally, where possible you should work with the client on some small orders first before tying up too many of your resources with a client who hasn’t proven their terms. If something doesn’t feel right then take a second and a third look, especially if defaults from the supplier could really hurt your business.