Credit Policy for businesses and how to extend credit and manage credit risk

The end of 2007 brought with it bad debts and foreclosures that will continue through this year.  Even though there were signs of a credit crisis looming, the crunch came on quickly as people across the country began defaulting on their variable rate or sub-prime mortgages.  The mood on Wall Street went from one that left everyone feeling prosperous to one that left everyone scrambling and trying to recover.  The Dow Jones industrial average closed above 14,000 for the first time on July 19^th and things were looking up for the rest of the year.  As the crisis hit investors ran, deals fell through, jobs were lost and companies dissolved.  The true extent of this crisis is not yet known as it continues on, causing more job loss and heartache for people everywhere. 

With our nation heading towards even tougher times as we enter into 2008, it is imperative that you have a credit policy in effect or your business may not make it through the year.  Many business owners worry about a recession and how it will affect their business.  Business owners need to understand the economy enough to know that their business will be affected before the recession really hits and you must take preventative steps in order to avoid problems when we are in a full recession.

Foreclosures are at the highest levels in modern history, keeping up to date on foreclosures happening in your area is crucial to your business.  You can make sure your business is protected by going over all of your accounts that you extend credit to, make sure they are in good standing and up to date on all invoices.  Now is a good time, if you haven’t already, to review everyone you extend credit to.  If you have signed credit applications and are authorized to pull credit reports and check with banks and vendors on someone’s payment history, now is the time to revaluate each customer’s credit and credit limits.  Check for things such as late or slow payments, change or loss of jobs, changes in income, change of address, and divorce.  Take immediate action if a customer’s mail is returned and/or the phone is disconnected.  Many times when the economy suffers people lose their jobs, their relationships suffer, and they may move to cheaper housing or lose their vehicles.  All of these things are factors that lead to your bill not being paid and can sometimes end in bankruptcy.

Consumer bankruptcy filings rose 40% in 2007 and as we move forward in 2008 that number is already rising.  Due to the housing market turmoil and increasing consumer debt, many more people are filing for bankruptcy protection.  The heavy consumer debt load is not getting any better and with the home mortgage crisis, many more consumers will file for bankruptcy this year.