Sooner or later, every credit professional will be asked this question by their boss: “What credit limit do you recommend we assign to this customer or applicant — the one with the deficit net worth?”
Customers with a deficit net worth are technically insolvent, and insolvent companies have a nasty habit of filing for bankruptcy protection. There is no good or right answer to this question. The answer depends on your company’s tolerance for credit risk. However, the fact that your manager is asking you for a recommendation suggests that s/he believes the customer should be given open account terms at some dollar level.
I use one of two approaches to address this problem. The first involves rephrasing the question this way: “If you are asking how much credit I would extend to a company that is technically bankrupt, the answer is that I would not recommend open account terms.” This response is honest and direct, and makes your position crystal clear.
The other approach involves explaining that your experience does not provide you with any guidelines relating to recommending credit limits for customers with a deficit net worth, and that you would appreciate their help. Ask for their guidance about what process they would use to determine how much money your company is willing to risk on this type of customer. Done correctly, this can become a useful training tool for the credit decision-maker.
Both approaches might cause your manager to question your willingness to make tough decisions. The good news is that you may be able to avoid the problem altogether by updating your Policies and Procedures Manual. If you develop a Credit Policy that addresses who has the authority to extend credit to the highest risk companies, and what facts and factors that credit decision will be based on, you can avoid being caught between a rock and a hard place.
I am always interested in hearing your opinions. Please let me know how you have handled this challenge effectively.
Michael Dennis’ Covering Credit Commentary. Michael’s website is www.coveringcredit.com.
The opinions presented are those of the author. The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors. Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.