Which Customers Should Receive Credit
A business offering credit runs the risk of not receiving payment for goods or business supplied. Thus, care must be taken over the typr of customer to whom credit facilities are offered. The five c’s of credit provide a useful checklist when considering request from a customer for supply on credit.
Capital: The customer must be financially sound before any credit is extended. When the customer is a business, an examination of its accounts should be carried out. The profitability and liquidity of the customer shoul be checked. Any financial commitments like capital expenditure and contract with suppliers must be taken into account.
Capacity: The customer must appear to have the capacity to pay amounts owing. Where possible, the payment record of the customer should be examined. If the customer is a business, the type of business operated and physical resources of the customer who whishes to buy on credit must be checked
Collateral: It may be necessary to ask some kind of security for goods supplied on credit. When this occurs, the business must be convinced the that the customer is able to offer some form of security.
Conditions: The state of the industry in which the customer operates and the general economic conditions of the paticular region or country may have an important influence on the ability of the customer to pay outstanding the amounts outstanding.
Character: It is important for a business to make some assessment of the character of the customer. The willingness to pay will depend on the honesty and integrity of the individual with whom the business is dealing.
Category: Financial Management
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