Explain credit analysis. What are the sources through which a company gets to know about a customer's credit worthiness?
Every company operates to maximize its profit by increasing sales. In order to increase its sales company gives credit to its customers. Before giving or extending the credit company first checks the creditworthiness of the customer. Hence for deciding the creditworthiness of the customer the company considers various factors such as financial status of the customer, reputation of the customer, capacity of the customer, previous records of the customer dealing with the company, image of the company, character of the management of the company etc. which helps the company in credit analysis.
The following sources help the company in deciding the customer’s credit worthiness:
1. Trade References: These are provided by the companies already trading with the customer.
2. Bank References : These are provided by customer’s bank to indicate their financial standing.
3. Credit Agencies : These agencies provide credit rating for different companies. Information can also be obtained from various sources such as bank, newspaper reports, court judgments, payment records, in return for a fee
4. Financial Statements : These can be obtained either direct from the business, or from companies house.
5. Past Experience : Supplier can access existing customers past payment records to check their creditworthiness.
6. Personal Contact : Information on customer’s creditworthiness can be obtained through interviewing senior management and staff.
7. Salesman’s Interview and Reports
8. General sources of information: Trade journals, business magazines and the columns of the business press keep the credit managers updated with the factors influencing customers’ businesses.