How and where you can get information about the credit worthiness of your customers?
Proper credit and inventory management can have a significant impact on the profitability of any business and value investors place on it. If you are looking for credit history of their customers, there are number of options available to you. Most commonly sources to assess the credit worthiness of your customers include the following:Financial Statements
Financial statements are usually available on firms’ websites therefore can easily be accessed. If not, then customers (firms) can be asked to provide their financial statements such as balance sheet and statement of profit and loss. Different financial ratios; such as short-term solvency ratios and long-term solvency ratios can be used as a basis to decide whether to extend credit to the customers or refuse them.
Customers’ payment history can easily be accessed through their credit reports. Only few firms sell information on credit history and credit strength of businesses. They usually provide credit reference books and credit reports on individual business firms.
Business customers may ask their banks to provide information on the credit worthiness of other business firms.
Customer Payment History
The most common way to obtain information about likelihood of customers default is to examine whether they have settled their past obligations timely or not.
Short term solvency ratios are used to assess the firm’s ability to pay its short-term obligations and long-term solvency ratios are used to assess their ability to pay their long-term obligations without undue stress.