The upward turn in our economy has cleared the air in several respects. During the recession, submarginal concerns either liquidated or have been clearly identified by credit executives. Then there are the "cliffhangers," those businesses--whether they are marginal or in some instances once solid firms--that are floundering on the edge of financial collapse. Therefore, having weeded out the obvious, credit executives are by no means in the clear.

One of the primary mandates in the business world is to strive to maintain or increase a company's share of a particular market. This means selling to accounts that would be classified as "marginal." Empirically, ascendency of our economy after recessions places marginal accounts in the spotlight. This is because they have managed to survive during a period of financial stress.

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

Although these survivors may be termed "a different breed," they do deserve your consideration more than ever, in maintaining or increasing your share of the market and increasing your profits. Another reason for doing business with marginal customers during an improved economic climate arises when your fixed costs most likely are absorbed and you have a capacity for greater production. Consequently, sales to marginal accounts would require that you recover only your out-of-pocket costs, thereby significantly increasing your profits.

However, marginal customers still require concerted and in-depth inquiry and analysis as to their creditworthiness. Cursory credit-checking is an invitation to trouble, either immediately or in the near future. It is most important for credit managers to emphasize the ABC's of credit checking in deciding whether they will do business with marginal customers.

The points that follow are fundamental. Nevertheless, a short refresher is sometimes helpful.

• Get more information than usual. Put more responsibility on the salesperson who will service this borderline customer.

• If you are a large supplier, find out the identity of other major suppliers and exchange information with them. Also interview the customer's banker.

• Obtain balance sheets and operating statements directly from the customer and make arrangements to get new ones at regular intervals.

• Make a personal visit and observe the business quarters, accounting practices, insurance protection, credit and collection policies, and knowledge of the industry, and look for weaknesses in management.

• Look into the general business conditions of the marginal concern; it's safer to sell if things are on the ascent.

A marginal account is one that does not have all three basic C's of credit in the proper proportions: character, capacity (business ability), capital. Any of the following may indicate a marginal status: poor pay record, request for longer terms, reduction in profits, operating losses, new business venture with inexperienced principals, new business with little capital, old business with new owners or management, ratio analysis showing a weak condition, most assets pledged to others, and a generally unsatisfactory business record. When you take chances with marginal accounts, you will have some bad debt losses. Therefore, all marginal accounts should be analyzed carefully to determine whether the increased sales volume is worth the direct losses plus the increased expenses and extra work involved.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.

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