Bad Credit Business Credit Cards

Before granting credit to a prospective customer, a firm must ask the question: How credit-worthy is this customer? In truth, one mistake in judging the customer can lead a firm into bad credit.

In judging the credit-worthiness of an applicant the three basic factors -- the three C’s (character, capacity and collateral) -- should be taken into perspective.

Character refers to the willingness of the customer to honor his obligations. It reflects integrity, a moral attribute that is considered to be very important by credit managers. Capacity refers to the ability of the customer to pay on time. This depends on the financial situation, particularly the working capital position and profitability, and the general business conditions affecting the performance of the customer. Collateral represents the security offered by the firm in the form of mortgages.

There are several ways in which you can find out whether a customer is likely to pay his debts, including analysis of financial statements, obtaining bank references, analysis of the firm’s experience, and numerical credit scoring. Financial statements contain a wealth of information about the customer’s financial condition and performance. A probing analysis of these statements can provide useful insights into the creditworthiness of the customers.

The banker of the prospective client may be another source of information about his financial condition. This information may be obtained indirectly through the bank of the credit-granting firm to ensure a higher degree of candidness. In addition, consulting one’s own experience is very important. If the firm has had previous dealings with the customer, then it is worth asking: How prompt has the customer been in making payments? How well has the customer honored his word in the past? Where the customer is being approached for the first time, the impression of the company’s employee about the integrity of the customer is very important. Finally, one can also use numerical credit scoring methods for the credit evaluation.