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Date: April 24, 2019
Posted by: CPDMA Team

Credit and collection policy: which option is right for your company?

Default harms all types of economic activity and is almost inevitable in a crisis environment. However, its impact on economic agents can be minimized, as will be seen in this brief article, which proposes a reflection on what is the correct credit and collection policy for your company. Forward.

The credit granting policy aims to outline strategies for entering and securing the market, minimizing, as far as possible, the risk and impact of default on the company's cash flow; that is, it seeks to achieve profit, with risk adjustment, and to satisfy customers, while at the same time seeking to maintain a solid credit portfolio.

The first step in establishing a good credit granting policy involves self-knowledge. The company needs to understand the timing in which its venture is. Thus, before any action, you should seek answers to the following questions: am I entering or do I already dominate the market in which I operate?; what is my cash capacity to face default?; to whom can I grant credit?; What criteria should I use to evaluate a potential client? In other words, assess your client's risk and learn about the six Cs of credit, a widely used analysis framework. See below what they consist of.

Character: Information referring to the client's character, suitability and reputation. Capacity: This “C” must provide information that makes it possible to assess whether the income and expenses allow the fulfillment of the obligations to be assumed. Capital: Information regarding the capital structure, indebtedness, liquidity, profitability and other financial indices obtained through the client's financial statements. Collateral: It is the ability of the company or partners to offer guarantees for the loan. Conditions: Information regarding the ability of administrators to adapt to conjunctural situations, to have the agility and flexibility to adapt and to create defense mechanisms. Conglomerate: Information on the situation of other companies located in the same economic group and how they may affect the company.

It is very important to remember that the financial rhythm at which the company will remain in the market, in relation to sales, will be determined by the credit policy adopted by it.

The fact is that, even adopting a strict credit policy, no company is safe from becoming a victim of default at the current moment. Therefore, the entrepreneur needs to keep in mind that, instead of excommunicating the defaulting customer, it is more productive to bet on a good collection strategy.

It is possible, with simple measures, to make credit recovery more effective. Among these, the following are essential: always update each client's registration, checking and consolidating as much information as possible; register your sales, mainly with proof of delivery of the goods, specifying the purchase code or invoice number, transaction value and the number of installments; keep credit status updated and under control, with information such as “paid”, “pending” and “delayed”. From this basic organization, it is possible to have the necessary tools to plan the collection, being ideal to establish a routine of action against default.

Finally, based on these premises, it is up to the entrepreneur to choose the most appropriate options for granting and redeeming the credit offered in the market. The most important thing is to create a credit and collection policy according to the particularities of the business, to minimize the risk of default.

From all that has been said, it is crucial to follow the following steps: determine the rules and conditions for granting credit; write down all sales and control accounts receivable; streamline processes with management software; script and organize the collection of debtors; and, finally, respect the Consumer Defense Code (CDC).

Source: Flávia Webster, attorney at Cesar Peres Dulac Müller, is a specialist in Civil Law and Procedure and in Credit Recovery.

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