The 4 Cs of Credit

1. Character

Someone’s character is their integrity about how they conduct their business affairs – these are people whose word is their bond. If you are lucky enough to know these individuals, you will not hesitate to extend repayment terms.

Customers with strong character competence are straight shooters and would tell you upfront they could not purchase from you if they could not afford it.

As your business continues to grow, you may lose touch with your customers, and the deals begin to flow through your sales representatives. At this point, character competence isn’t enough and your business should start to implement more decision tools to aid your sales staff.

2. Creditworthiness

The second of the 4 Cs of credit is creditworthiness. Determining your customer’s ability to pay or manage credit can be accomplished in several ways.

Your credit applications form should ask your customers for other suppliers that have extended credit. Calling credit references and inquiring about their experience with your customers can provide some level of comfort. However, the credit reference may also be your competitor, so don’t expect much cooperation from them.

Another way to check customer creditworthiness is to obtain a credit bureau report. Information from a credit bureau like Dun and Bradstreet is only as useful as the data fed into it, so be prepared to supply the bureau with your customer’s financial data. The report will tell you how your customers are paying other creditors.

Sometimes your business customer is recently incorporated, and the commercial credit file contains little or no information. In this case, it is advisable to obtain the business principals’ guarantee so you can get their credit file. People generally run their businesses like they manage their credit.

3. Cashflow

The third of the 4 Cs of credit granting is cash flow. How does your customer derive its income? Is their income consistent or seasonal? Do they operate a cash business, or do they offer repayment terms to their customers?

• If your customer is an individual, you can ask for a copy of pay stubs or tax filings.
• If your client is a business, you can request a copy of your customer’s income statements and balance sheet to assess your risk.

Ask what payment terms they extend to their clients. If your customer’s client is a large oil producer, that pays at 90 days, and your terms are 30 days, then your customers should have access to a line of credit at their bank. Otherwise, you’ll have to wait until the oil producer pays its bills to your customer.

4. Conditions

Conditions are the most often overlooked of the 4 Cs of credit granting. In the example above under cash flow, the condition of the customer’s market in the petroleum industry creates the potential for your customer to become delinquent.

Seasonality is another common condition that affects those supplying to the agriculture industry or suppliers of any commodity. The demand and pricing of commodities can change overnight, leaving your customers in a precarious financial position.