Protect Your Business with the 5 Cs of Credit 

Do you allow customers to pay you later? Let’s say in 10, 15, or 30 days? If you do, your business is extending credit that could make or break your cash flow. Savvy business owners (regardless of size), use the 5 Cs of Credit to protect their business from loss. 

Character

If you live in a small community, this is the filter you will likely use the most. What is your customer’s reputation in the community? Do you hear good things about them from other business owners, from their customers? It is not inappropriate to ask for references from their other suppliers to prove that they honor the terms of the credit extended. 

Capacity

Does your customer have the ability to repay you? If you set a high limit on the credit you are willing to extend and they max out that credit, will they default or take months to pay you back for an invoice due in 30 days? Consider setting a low time or dollar limit for new customers until you develop some history with them. Dip your toe in the water before you take a plunge.

Capital

There are a few ways to think about capital in the small business context. Traditionally, a lender such as a bank will want a customer to show they can bring some of their own money to an agreement to show that they are serious and can practically manage to pay back credit. Your small business could ask a customer for a deposit, or require a payment plan. 

Collateral

If you are entering into a financially significant agreement, ask your accountant or lawyer about how to protect yourself from loss by including collateral (an alternative source of repayment) in a transaction agreement. This may sound like a tool that only banks or large corporations utilize, but small businesses use it successfully as well.

Conditions

What industry does your client operate in? Is it financially high or low risk? Are they new to their industry or established? Considering your client’s business environment can help you determine the risk in extending them additional time to pay you.

Contact your chartered professional accountant if you need suggestions on how to integrate credit checks into your operations. It’s always a good time to protect your assets and build the best possible relationships with your customers.