Selling to Non Creditworthy Accounts

At one California high-tech company, where customer visits are regarded as investments rather than expenses, there is keen interest in seizing the sales and profit potential available from properly crafted relationships with "non creditworthy accounts." "Controlled sales to selected non creditworthy accounts under the right conditions can be a source of incremental profitability." is how their written credit policy puts it.

Their credit director explains that "non creditworthy" implies very excessive slow payment, excessive over trading on equity, or an unbalanced financial condition that exceeds your standard for any of the above. There's little difference, he adds, between high-risk and non creditworthy accounts. "High-risk accounts marginally meet your standards for the above or just narrowly miss."

Their policy on selling to non-creditworthy accounts lists the following additional points:

• Always have financial disclosure from a perceived "non creditworthy" account.

• Always perform verbal bank and trade reference updates for perceived non creditworthy account.

• Don't be shy about calling the bank or the trades as many as 3 to 6 times per year depending upon the risk and dollar exposure.

• Don't be afraid of asking for an irrevocable Letter of Credit, Security Agreement, UCC1, or if applicable, a subordination agreement. You can offer to match the LC amount with your overall unsecured credit commitment.

• Make one-time sales to non creditworthy accounts before you make a significant commitment in exposure.

• Make sure you visit non-creditworthy accounts before you make a significant commitment in exposure.

• Always keep an eye out for bad debt warning signals when selling these accounts.

• Remember, don't throw good money after bad. Make sure there is some justifiable reason for selling to perceived non creditworthy accounts.

• Logic implies that you should have a high profit on sales to these customers --otherwise, what exactly are your objectives?

• Make sure that senior financial management is in agreement with your philosophy regarding selling selected customers under the right conditions.

• Don't make these sales without keeping track of total credit sales approved for perceived non-creditworthy accounts. Quantify the incremental profitability generated by sales to non creditworthy accounts.

When developing relationship plans with high-risk (non creditworthy) accounts, this credit department follows this sequence of steps:

• Review financial analysis to determine initial viability and liquidity estimates.
• Determine profitability on the customer's sales.
• Meet with the sales department for a marketing review.
• Review projected shipping schedule or estimated monthly requirements.
• Establish anticipated or expected payment range.
• Establish acceptable exposure range.
• Establish financial disclosure requirements.
• Establish credit support requirements.
• Conduct relationship plan meeting with the customer.
• Plan relationship follow-up requirements.

Download the Follow-up Letter Used
In keeping with their emphasis on customer visits, a credit relationship with a high-risk customer would always be preceded by meeting. Following the meeting, the credit director always sends the customer a follow-up letter outlining terms and emphasizing the details of their relationship.

To download the letter he uses, click here.