Staffing Company Credit Policies
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Extending Credit in the Staffing Industry
There is an adage: “A sale is not a sale until you collect. “ Knowing your customers’ financial condition requires more than establishing a personal connection with them and looking past the brand.
Establishing credit limits and assessing the customer’s creditworthiness before offering credit to a customer is crucial to reducing risk.
First, start by figuring out the credit line necessary. To do this, you’ll need to address the following questions:
- How many employees will be required? What is the minimum and maximum number of employees that may be necessary?
- What is the hourly billable rate for each type of employee?
- Proposed sales terms (net 30, 45, 60)?
By multiplying the billable rate for each type of employee by the potential hours needed, you can determine the minimum and maximum credit line required.
However, knowing the required credit line is not enough. Before extending the credit line, it is important to confirm that the customer can handle the credit limits and assess whether you can verify that the customer has the capability to make the payments within the specified terms.
You must also consider other factors related to extending credit to the customer, as these can impact business cash flow and exposure.
Let’s talk about these critical considerations.
Other Key Considerations When Extending Credit
In addition to credit limits, here are some essential factors to consider when extending credit:
Credit Assessment: Before extending credit to a customer, it’s essential to assess their creditworthiness. This process involves evaluating factors such as credit history, time in business, financial stability, existing creditors, payment behavior, litigation, liens, and current financial obligations.
Utilizing credit reports, financial statements, and third-party reports from Dun & Bradstreet or Experian can help in this assessment process. Factoring companies have sophisticated credit teams and can easily interpret mountains of complex data into simple decisions.
Credit Terms: Clearly define the terms and conditions of the credit extension, including the credit limit, payment terms (e.g., net 30/45/60 days), late payment penalties, and any other relevant credit terms (like who pays for litigation in the event of non-payment).
Ensure that these terms are communicated clearly in the staffing agreement and agreed upon by both parties to avoid misunderstandings or disputes later.
Credit Monitoring: Regularly monitor customers’ creditworthiness and payment behavior to identify any signs of financial distress or non-payment risk. Implement proactive credit management strategies, such as regular credit checks before extending additional credit, credit limit reviews, and early intervention for overdue accounts, to minimize losses and further exposure.
A good factoring company operations team has a wealth of credit experience and can often see warning signs even before they appear—unpleasant but generally good medicine.
Learn more about receivable monitoring here.
Concentration: To minimize concentration risk, avoid over-reliance on a small number of customers. Diversifying the customer base and spreading credit exposure across multiple customers and industries reduces the impact of potential defaults, economic downturns, or being subject to their whims.
It is essential to secure big customers, but any payment issues will have a much more significant impact on your business than those of small customers.
Here’s more information about customer concentration, including a tool to calculate your business concentration.
Credit Insurance: Consider purchasing credit insurance to protect against non-payment risk. Credit insurance policies can provide coverage for bad debts and help mitigate the financial impact of credit losses assuming the customer is insurable and there is enough coverage for your exposure.
Credit insurance does not cover disputes, only non-payment due to insolvency. Factoring companies can provide credit protection as a component of their service.
Additional resources regarding credit policies:
By carefully considering these key factors and implementing intelligent credit management practices, businesses can effectively extend credit to customers while minimizing credit risk and maximizing financial stability and growth.