Offices & Operations mentor Charles J. Bodenstab responds:
A credit report on the potential customer is a good starting point, but I wouldn't stop there. Ask for credit references, but be careful that you aren't given only a few select accounts that get paid religiously. Ask for a longer list, and then pick the ones you want to check. Talk directly to the credit manager of the reference -- or better yet, have your credit manager (if you have one) do so -- in an effort to get the reference to talk openly about the account.

Incidentally, my experience is that getting financial statements, particularly from a relatively small account, is of little value.

It is always good to give a new customer a fairly modest credit limit at first. That limits your exposure and gives you time to gain experience with the company's payment performance. However, that isn't always possible or desirable.

You'll note that I haven't offered any surefire solutions to the problem. That is because even after you do your due diligence on the account, there is always a risk. Your creditworthiness check may turn out to be flawed, and even a sound company can get itself into trouble over time. Then your customer's trouble becomes your trouble. That's why management must pay constant attention to the accounts receivable function. You can't simply establish a customer's initial creditworthiness and then tune out.

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