The 10 Cs of Credit Assessment, and Review
DATED 1ST of May 2020
Subject: The 10 Cs FOR CREDIT ASSESSMENT, AND REVIEW
Below is the 10 Cs for Credit Assessment, and Review, taken from our new upcoming book:
“HAPPY CUSTOMERS,
FASTER PAYMENT”#HCFP
Saudi Arabia Edition
Co-authored with Mr.
@MarcelWiedenbrugge
Preface: below are the 10 credit assessment, due diligence pre-contracting, and review, which should be practiced, and applied, before granting credit to a new potential customer, and for periodic customer review (at least once a year), and more frequent for high-risk businesses - at least once every 6 months.
Note: the term “review” refers to the review of the contract (which should be a clause in your contract with your customers), and the periodic review of the of the credit facility granted to your customers.
1. Capacity:
Capacity refers to the legal status and financial capacity of your customer, and the owners and executives.You need to make sure that you are dealing with the right person, with the appropriate level of authority, prior to signing any contract and/or extending any credit, or renewing it.
The company’s board of resolution is a great source to see the level of authority the person you are signing with has, so be sure to obtain a valid copy for your files.And the Credit Bureau will give you a clear reading of all financial credit facilities, a balance sheet - prepared by an external firm - will give you in-depth information about your customer’s assets and liabilities. However, the balance sheet needs to be audited and approved by a separate body, and not the same external accounting firm.
2. Cash Flow:
Cash flow refers to liquidity, and seasonality.Cash flow derived from income or revenue should be linked to repayment schedule to ensure payment in due time.This includes the customers’ cash inflow and outflow, as in some cases, you may find that most of the inflow goes out for operational expenditure, or that the cash-flow does not match with (or contradicts with) the size of the firm, their projects, or stated capital in the commercial registration.
3. Capital:
Capital refers to the officially stated capital in the commercial registration.It is an indicator of your customer’s ‘financial’ size and capability.We urge you to match the capital in the commercial registration to the cash-flow, cross-checked against the balance sheet and bank statement(s) to spot possible discrepancy, gaps, mismatch, or inconsistency.
4. Collateral:
Collateral is also referred to as securities, guarantees or pledged assets, offered by your customer to cover the credit facility.In KSA, the best type of collateral an “execution note” - other types of securities and guarantees are covered in more detail in the ‘execution notes’ and ‘guarantees’ section later in this book.
5. Characters:
Characters refers to the type of company, as per the official commercial registration, and the characters of the owners and executives, and their reputation.You need to understand the type and status of the firm you are dealing with; is it a limited liability company, or personal establishment, or other legal entity status, and how their legal entity status may affect your ability to collect in the future, depending on the obligation of their legal status, and should you need to take legal action.
6. Conditions:
Conditions refers to the type of business your customer is in, i.e., their business environment.In other words, what are the potential risks associated with their line of business, and the customers of your customers’ business classification in accordance to the various risks types (risk framework), as previously explained.
7. Credit History, and Commitment:
Please note that “Credit History” is not restricted to the information available with 2 Credit Bureaus in KSA (Simah and Bayan), it is beyond that, it includes your customer’s credit history with your company, and other companies (including your competitors).And commitment is based on your experience with your customer in terms of their commitment to making timely payments to you, and to other creditors; including their credit behavior and utilization of your credit facilities, products and/or services.
8. Customers:
Customers refer to your target market (targeted segment), their size, location and strengths, and so-on and so-forth, and the same applies to your customers’ customers - as they will eventually have a direct, or indirect, impact on your customer’s business, which will affect their payment ability.You need to fully know who your customers serve (their targeted market and segment of customers, and their demographics and psychographics) to have a full 360 degree about your customer, and what may influence his payment capability and performance.
9. Concentration:
This refers to your customer’s business concentration, and what/where the bulk of it is, including the concentration (and bulk) of your customers’ customers.In other words, are you dealing with a single-line business entity with a single-source of income, or is your customer a diversified company with multiple streams of income.A company that is single-line focused one type of business is usually considered to be a higher risk in the event that particular “single-line” is exposed to a specific risk.To give you a super clear example, is Saudi Binladin and Saudi Oger, to gigantic companies, with multi-billion dollar projects, yet they both were a single-line business, with focus on contracting mega-projects, and when their business took a nose-dive, they filed bankruptcy, along with their sub-contractors and creditors.
10. Country:
This refers to the political landscape and judicial system of the country, and the governing rules and regulations.For example, some countries request and accept post-dated checks as security, while in KSA such practice is illegal, and shall make the creditor subject to penalties, and in some cases may be fined.And the Judicial system is wide and specialized, as KSA has various courts depending on the type of security, the parties involved, the claimed amounts in dispute, and so on.
For example, litigation based or depending on a promissory note will go to the “Execution Court”, while if it simply depended on the contract between the debtor and creditor, without an ‘execution note’ would go to the commercial / general court.
I hope you have enjoyed, and benefited from, the above information.There will be more articles from our book “Happy Customers Faster Payment”, Saudi Arabia edition, so stay tuned to enrich your learning experience and enjoy the journey!
To be sure you don’t miss-out on our future and past articles, constantly check-in on us, or you may simply search by using our unique hashtag #HCFP -- i.e., which stands for Happy Customers, Faster Payment.
Best regards,
Dr. Abdulrahman Abukhalid,
Mobile: +966-55555-1969
The Giant for Consulting, KSA
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