The Cost of Credit — How to Improve Your Chances of Collecting Accounts Receivable in a Down Economy
Manufacturers, distributors and other merchants of goods who sell their products on credit terms routinely accept a high level of risk of defaulted payment from their customers. In good times, credit-related losses are relatively predictable as a percentage of sales and can be offset by variations in pricing and volume across a seller’s sales transactions. Unfortunately, we are far removed from the good times. The prolonged economic slump has resulted in increased payment defaults and a 150 percent rise in business bankruptcies since the summer of 2007. In this economic climate, a seller’s legal documentation and credit terms can make the difference between payment in full and a bad debt write-off. Now more than ever, companies that sell goods on credit must diligently evaluate their credit policies and make informed decisions with respect to their documentation, credit enhancements (or lack thereof) and exercise of post-default remedies.