Granting Credit

Question 1

External sources

Answer 1

Trade credit and supplier references
Bank references
Credit reference agency reports
Management accounts
Credit circle meetings
Official publications

Question 2

Refusal of credit terms should be communicated to the
customer in what ways?

Answer 2

1) by letter
2) with reasons for refusal
3) courteously

Question 3

What are the typical credit terms?

Answer 3

1) Cash on delivery
2) Cash before shipment
3) Net 30 days : payment due 30 days after delivery
4) Net monthly: payment for one month’s deliveries to be
made by end of following month
5) Load over load: pay for last load before next delivered
6) Cash with order

Question 4

Possible reasons for refusing credit

Answer 4

1) Poor trade references
2) Concerns over validity of trade receivables
3) Lack of historical accounts due to being a new company
4) Indications of business weakness from ratio analysis
5) Poor credit agency report
6) Poor / non- committal bank reference

Question 5

Internal resources to granting credit

Answer 5

1) More reliable than external sources
2) cost effective

Question 6

Internal resources to granting credit

Answer 6

1) Staff knowledge
2) Customer visits
3) Analysis of aged receivables or customer financial statements

Question 7

Staff knowledge - granting credit

Answer 7

Staff and colleagues who are dealing with customers on a day to day
basis can build a close relationship with customers, and this can be invaluable when considering a customer’s credit facility. Staff who han contact with customers can have a good idea one whether the customer is doing well or in financial difficulties.
Indications can be any changes in key staff within a customer’s
business or the business’ standing and reputation in the market place.

Question 8

Customer visit - Internal resources to granting credit

Answer 8

Feedback how staff visits to customer’s premises can be useful in gaining a picture on the credit worthiness of business.
Positive signs can include good morale with the customer’s staff and easy shop or office.
Negative signs can include disorganised premises or observation of dissatisfaction for their own customers or staff.

Question 9

Internal resources - granting credit
Analysis of aged receivables Or customer financial statements

Answer 9

Regular reviews of aged receivables reports can help to identify customers who are paging on time and staying within their credit limits. Such reviews can also highlight late payers and customers with irregular payment patterns.
Analysis of customer’s financial statements can be helpful in many ways through analysis of indicators and ratios. There can fall under the following three headings: profitiability, liquidity and gearing.
The credit control function can then devise and apply a scoring system using these calculations to rate the riskiness of a customer. This enables can objective coldir assessment decision to be reached.

Question 10

External resources - trade references

Answer 10

These provide evidence of whether a business pays its other suppliers in accordance with their payment terms. This is useful to know because it gives indication as to whether they will stick to our terms.
Trade references also tell us the credit limits that the business is getting from other suppliers. This is useful information so that we know uh at limits they are used to working within.
Tmore reference do need to be treated with an element of scepticism.
Only small number can be requested , and the business is likely to choose that it thinks will give them a good reference.

Question 11

External sources- granting credit
Bank references

Answer 11

These can be useful way of obtaining information about the financial position of the business from a third party.
However , we must remember that the bank’s loyalty will be with its customer rather than us.
Banks tend to use standard phrases that may need interpreting to ensure we fully understand what the reference is saying.

Question 12

Bank references
Unqualified, positive assurance

Answer 12

,, The business is undoubtedly good for your figures quoted,,
This is the best type of reference , the customer should be considered
low-risk for the credit amount and period

Question 13

Bank references
Good for your purpose ( General indication )

Answer 13

,, The business is good for your figures And purpose,,
Probably acceptable , but not as good as r unqualified , positive assurance.
Still fairly low risk

Question 14

Bank references - Should be good for your figures ( general indication )

Answer 14

,, The business should prove good for your figures,,
A little less certain than the other responses and the use of, should, means farther investigation and information is needed to more a reasoned decision.

Question 15

Bank references - Guarded statement

Answer 15

,, Although their capital fully employed , we do not consider the directors would enter into a commitment they did not think they could fulfil,,
If the bank are ,, unable to speak for your figures, this is the host response and you should consider this customer to be a high
risk.
If the bank states that, capital is fully employed, this indicates that
the business is short on cash and it would be risky to grant credit.

Question 16

External resources - Credit agency references

Answer 16

These bodies are protected under the Consumer Credit Act 2006 and therefore have strong protection on the handling of information. They are commercial organisations who specialise
in providing information about the credit status of businesses
and individuals. They hold large databases of information
relating to financial statements , addresses, directors’ details and bankruptcy or insolvency proceedings. They may also provide a
credit rating or score.
They are useful:
1) Experience
2) Information is generally up to date
3) can confirm other infomation received
4) low cost
5) Speed ~ It would be costly and time-consuming to find
all information yourself

Question 17

External resources- Credit Circles

Answer 17

Then is a group of people with a common interest, for example
a trade association or group of competitors with customers in common. They share information on credit matters, usually
through a formal meeting.
They can be useful for assessing the reliability of both current
and potential customers

Question 18

Explain the sources of information that can be used to decide whether to grant credit to a customer or not

Answer 18

Receivables Ledger Information:
Looking at previous invoices and receipts a customer has had can help decide whether they pay
on time or at all.

Trading history:
The period of time a company has been trading for will help as more established companies are
less likely to default than new businesses.

Aged Analysis:
Looking at the total amount of credit already granted to all customers can help decide whether to
offer further credit or not.

Staff:
Discussions with staff about what they know about a customer can help as there may be information that they are aware of that is not written down concerning future plans of the
customer or difficulties with them, which might influence a decision.

Customer visits:
A visit to a customer to see the scope of their operations and current trading position can help decide whether they look to be a good business to extend credit to or not.

Financial analysis:
Conducting financial analysis such as ratio analysis can help understand the position a business is in, and whether they look to be in a position to repay any credit given to them.

Trade references:
A reference from existing suppliers a customer uses can give us information about whether they
pay on time and at all. If they deal well with other suppliers, it gives comfort they will do the same with us.

Bank reference:
A bank reference will give a banks opinion on whether the business could support the amount of credit they are applying for.