Describe three methods for limiting the risk for a company that extends credit to its customer?
Three methods for limiting risks for a company that extends credit to its customers is to have each customer complete and update annually a credit application, check its customers credit worthiness with reference checks and credit score checks, and only offer small credit balances.
Credit Applications:
Each customer whom wishes to have credit with your business must complete a credit application to include: contact info, Federal Identification Numbers, personal guarantee of owners with social security numbers along with acceptance to check credit scores. These credit applications must be kept on file and updated annually.
Check Credit Worthiness:
Each credit application should be reviewed for accuracy and credit worthiness should be checked. Credit references should be obtained and updated annually. Credit score should be obtained and received annually.
Keep Small Credit Balances:
Limit the amount of credit available to customers. Keep balances small, if credit limit is not used reduce yearly or if needed increase. Maintain a equilibrium with past performance. Account receivable balances should be reviewed periodically and be kept within terms. The minimum number of days in accounts receivable is preferable.
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