BENEFITS OF A CREDIT REFERENCE BUREAU

BENEFITS OF A CREDIT REFERENCE BUREAU
“if you don’t pay by ……… you will be blacklisted in the credit reference bureau” this is a common statement widely used by most debt recovery staffs in most organizations. CRB has been painted as a Monster that has no good to the economy other than to threaten defaulters to pay their bills and debts. This kind of thinking is retrogressive and will only do harm to the economy.

Credit Reference bureau benefits both the lender and the borrower and it is a tool that can bring benefits to the world economy. In developing countries the CRB concept is very new and has not been widely accepted but with an increase in defaulters, it is gaining momentum but at a slow pace.

The benefits of a CRB should be a win-win situation that enables lenders to access good customers and also for customers with a good credit history to obtain credit at better terms. The benefits that accrue from a CRB are;
• Reputational collateral
• Business growth
• Improved margins
• Increased customer loyalty
• Improved revenue collection
• Fewer defaulters.
Credit reference Bureau therefore plays a role in the growth of the entire economy. Let’s embrace the concept for a better debt culture that benefit all.
www.creditmanagement.co.ke

HOW SUPPLIERS AND LENDERS CAUSE THEIR CUSTOMER’S RUIN.

Biting more than you can chew is a common phrase used to denote prudence, yet the phrase is rarely put to good use when it comes to interactions between suppliers and lenders.

In the recent times we have seen retail establishments thrive and expand, which is a natural course of business.

But behind some of these expansions are unhappy suppliers whose payments are not being paid on time, despite the fact that the retailer’s business is 99% cash. As retailers expand, they demand a more flexible credit limit in order to stock their new outlet(s), hence tying more of the supplier’s operational funds.  Because every supplier is competing to have his/ her products on the retailer’s shelves, the supplier ends up extending credit in terms of goods and a more elastic repayment period as per terms dictated by the customer.

It is only prudent to establish if the person buying your goods on credit or borrowing your money has the financial capacity and willingness to repay back your money. If the business establishment or individual(s) has the ability, it would be wise to put a limit on how much can be advanced as credit and the length of time to settle the credit facility so advanced.

Always go through the why, how & when steps to establish a basis for extending the credit facility. Why-do you need the credit facility, How-will you meet your credit obligations, When- do you expect to pay back, are practical questions to ask a would be borrower /debtor, before extending credit.

Suppliers and lenders should never operate at the mercy of debtors and need to keep in mind that it is their money at stake in case of default.

As a supplier or a lender, it is important to understand your customer’s nature of business so as to establish the volume of credit and, the terms of credit to extend to them. If your customer runs a retail business, where most of their transactions are on cash basis, a shorter credit period would be ideal. Otherwise, extending longer credit repayment periods will choke the client (with excess cash) who, thinking that the money is his/ hers, is likely to divert such cash to other non-core activities, like real-estate or expansion.

It is important for suppliers and lenders to know that credit is a cost to the business and if not properly managed can lead to the loss of a budding client and collapse of their own valued business.

How do we mitigate against this loss.

·         Have a credit policy in place detailing terms and conditions,

·         Know your customers (KYC) well in terms of ability, capacity and the nature of business. Make use of business information reports which can be outsourced from independent contractors e.g. site verification and credit reports from credit reference bureaus,

·         Employ qualified credit control staff,

·         Carry out credit reassessment on your customers from time to time to establish the status of their business at any given time.

·         Ensure that credit instruments, such as bank guarantees, are up to date.

In conclusion, it is only morally and ethically right for you as a lender or supplier, to protect your customers from the choppy commercial seas by first showing them how to swim in a pond of sensible financial planning.

In the event that a key customer gets into financial problems, your business is likely to be adversely affected as well.

Credit Management

COST OF CREDIT TO AN ORGANIZATION/BUSINESS

COST OF CREDIT TO AN ORGANIZATION/BUSINESS

Do you know that by extending goods and services to clients on credit can cause your organization dearly if not properly managed?  Credit can kill or make your company and it is therefore important to manage it if your organization objective is to maximize on profits gained from sales.

Maximizing profitability being one of the key objectives of any business, it is important that all activities be geared towards achieving this objective. Failure to manage the cost of credit will work negatively in achieving profitability in an organization and can lead to collapse of otherwise profitable venture.   

The reason behind extension of credit to customers is to maximize sales and in return earn more profits; failure to manage the receivables may result to bad debt and tied-up capital. Determining the cost of credit and factoring it in the price can help in profit maximization. The cost of credit is made up of three broad elements;

1.      Bad Debt cost

Not all your credit sales will be paid for and you will find some clients not honoring their obligation due to various reasons, despite of your efforts to recover from them. This will call for a provision for bad debts and even a write-off. The best thing for a company to do is to ensure that vetting is done properly before extending credit to customers in order to minimize this cost. Don’t just extend credit to any client before evaluation of their capacity and ability.

2.      Cost of Invested Fund

Most businesses run on borrowed funds to finance their operation which include extension of credit sales to customers. The funds don’t come without a cost and you are required to payback the loan with an interest. The interest on loan or overdraft must be considered when extending goods and services on credit and must be added to the price. Most companies don’t apportion interest incurred to their credit sales yet that is where most of the funds are tied-up. Opportunity cost is also incurred when all your monies are with the debtors, meaning that you cannot seize opportunities that may come your way due to lack of cash at hand. Debtors tie working capital which could be used to generate more profits if invested in other opportunities.

3.      Administrative Cost

These include costs incurred in form of salaries, collection activities and any other expense by accounts receivables. The costs must be factored when determining the cost of credit in an organization; the activities may include telephone calls, demand letters, personal visits and time spent in pursuing debtors.

To realize profitability by any organization that sells on credit, good credit management must be in place; otherwise the company may suffer or even go under-receivership as a result of bad debts. Be proactive in managing your debtor’s book if you want to reap the benefits of increased sales, resulting from extending credit.