In Focus Commercial Credit


Is there a magical credit line?


It is impossible to make the perfect credit decision every time, but how can you increase your chances?


Gozde Dulgeroglu Senior credit analyst, Seagate International gozde.dulgeroglu @seagate.com


We are all trying different tactics to define the best credit line for each customer, to do more business in a more efficient way. The question is: when you falter in


assigning a line, is there a magical credit limit for your customer? Sadly, the answer is straightforward: in truth, there is not!


Key indicators However, there are some determining factors that could help you to set up an ideal credit limit for your customer. None of these determinants alone is meaningful without each other. Credit is a bridge between your sales


team and customers, which needs to be fast, constructive, efficient, and a wise thinker; a magician that would support revenues in a safe way. Defining an ideal credit limit for each customer with critical thinking is the


kick-off to efficient credit management. So what should you do?


Know your customer It is important to know what kind of customer you are dealing with. Do you know the location of a customer’s business, primary market, payment terms, and sales? Are there any high concentrations? What is the added value of this customer into your business? Ask yourself honestly!


You need to be sure that the risk appetite


of your customer would not exceed what you could provide.


Do not forget the forgotten C of the five Cs of credit: ‘conditions’ To be able to adapt to changes, then have a proper comprehension of the range of macroeconomic factors in your markets is a must in the global economy. Without a good judgement on the general conditions, it is difficult to capture opportunities and it is difficult to eliminate risks.


Without a good judgement on the general conditions, it is difficult to capture opportunities and it is difficult to eliminate risks


Articulate the big picture behind the numbers Customers’ financials are the true story, so do not neglect any financial information on them. In order to clarify the ideal credit line, check the net worth of your customer. From a conservative perspective, a credit


line between 10% and 20% of the net worth is an ideal level to do business at. To be precise, consider this percentage in


your customer’s revenues. Do you want to be a supplier who is contributing into the customer’s revenues by 60% or by 5%? It all depends on your risk appetite, there is no right or wrong answer to this! When you are defining an ideal credit


line, look at some important ratios, such as leverage and liquidity. Margins and working capital needs, combined with the ability to generate cashflow, are crucial factors to define a credit limit. Understanding and interpreting the


numbers are the fundamentals of setting up an ideal credit line. As Warren Buffet said: “When people talk about cash being king, it is not king if it just sits there and never does anything.” We need to be smart magicians for better management of credit! CCR


18 www.CCRMagazine.co.uk January 2018


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