Courtesy D and B Canada, here is some great info on extending credit.

Extending credit -- it's the careful balance of limiting risk and maximizing profitability while maintaining a competitive edge in a complex, global marketplace.

How can you do this effectively for your business?

Many financial managers use the "Four C's of Credit" as their guide. We've listed the "Four C's" below and added some additional guidelines to help you make more profitable business credit decisions.

Apply the "Four C's of Credit" in Your Non-Financial Analysis

The "Four C's of Credit" include character, capacity, capital and conditions of the times. The significance of each factor may vary from case to case. The credit executive must measure the account against each factor before giving a final opinion.

Character

The history of the business and experience of its management are critical factors in assessing a company's ability to satisfy its financial obligations. Look at how long the business has been under the same control, and check for any previous litigation or bankruptcy information. Also, get a clear understanding of who owns the business, and who is ultimately responsible if a problem arises. Always get a list of the company's officers with their ages and backgrounds. Research the financial worth of principals for proprietorships and partnerships. Identify the exact business name and legal form of the organization. What products does it sell? On what terms? Is it a seasonal business? What are its margins? Get a sense of the character of the owners and the business's ability to compete in its markets.

Capacity

Make sure to assess the capacity of the business to operate as an ongoing concern in every credit decision. Principals in small businesses are often forced to wear many hats. Businesses must be able to allocate resources evenly to the various functions of the organization such as marketing and sales, production and finance. If the production manager has to put production work aside to make collection calls, or if finance is asked to telemarket, efficiency within the business could deteriorate. Keep an eye on management. Assess their experience and their ability to manage all aspects of the company without compromising efficiency. Does the organization have the facilities to handle your business needs?

Capital

Analyze the financial capacity of the organization in order to determine its ability to meet financial obligations in a timely fashion. Above we discussed the willingness of a business to pay its obligations, however, its ability to pay may be much more important. It is critical to understand the difference. For example, you may conduct business with customers unable to pay quite differently than with those unwilling to pay. Terms could be worked out for customers unable to pay immediately, but customers unwilling to pay on time could be priced for the inherent risk or denied altogether.

Watching customer payment habits over time is an excellent indication of cash flow. Also, check bank and trade references, as well as any pending litigation or contingent liabilities. Check for a parent company relationships. A parent company's guarantee may be available. Intercompany loans might affect financial solvency. Check agency ratings that predict slow payment or default to complete your investigation.

Conditions of the times

General economic conditions in the nation, in the community, and in the industry will exert a modifying influence on the financial analysis of an account. What industries are growing or shrinking? Is your prospect in a dying industry? During prosperous times, risk of credit loss is generally less than during a depressed period. Watch for any news items or special events that could affect the firm's ability to continue as an ongoing concern.