A company needs to have an effective credit management system to be successful. This helps determine how efficient a company will be achieving its goals and objectives. The other side of credit is collections. An collection department that operates effectively will help a company limit the losses it incurs, which can also increase profit and help the shareholders earn a return on their initial investment.
Ability
When a company starts extending credit, it needs to have policy for credit that allows it to maximize profits. There are several criteria a company will look at when it extends credit to consumers. The first is ability. The company wants to make sure a customer or client has the ability to pay, doing credit and debt ratio analysis to make sure someone is not overextended or cannot pay it back.
Credit History
The second criteria is willingness to pay. A potential customer's credit history is inspected to see how she paid her debts in the past. If someone has a number of past due debts, he could be disqualified from receiving a loan. Some companies might extend you credit if your credit is bad, but they will price the product accordingly. You will receive a higher rate of interest, which means you pay more finance charges over the term of your loan. As a way to offset risk, companies will also add non-standard fees to the account.
Stability
The company wants to know how long the consumer has lived at his current address and how long he has had his job. These factors help a company decide about extending credit. A homeowner is looked at in a more positive light than a renter. Homeownership, to a lender, is a sign of stability.
Collection Department
After credit has been extended, the collection department makes sure payments are on time. If someone falls past due, the collection department must call the debtor or send letters. The collection department must do its job efficiently and effectively to help limit the amount of losses incurred. Sometimes, high delinquency could be the result of a recession or other economic factors. Another cause of high delinquency could be the result of the credit department having very lenient credit granting criteria.
Delinquency
If delinquency is too low, it could mean the credit department is not being aggressive enough lending money. Low delinquency usually means there are a lot of customers being rejected when they should be approved. A company will loose money and potential customers to its competitors if it is too strict with its lending policy.
When it comes to credit extension, there has to be a fine balance.
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