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The recent financial troubles at CIT Group have ignited serious fears among hundreds of thousands of small businesses that have financial relationships with the company.
With the small-business economy already suffering due to limited access to credit and capital, insufficient bank lending, inadequate government stimulus and a decrease in net revenue, the extinction of the nation’s largest credit-protection provider would have created another major economic setback.
While the CIT situation seems to have at least temporarily stabilized, what can SMBs do in the meantime to better protect themselves?
One suggestion is to develop an independent credit-scoring model. In today’s economic environment, it’s simply insufficient to ask a potential customer for a credit application up front, check a few references and stick a copy of its financials into the filing cabinet. Whether a business is selling to a small or large company, it’s important to stay on top of the creditworthiness of every client, vendor or customer.
Implementing a credit-scoring model offers three primary benefits for small businesses. First, in combination with reviewing customer financial statements, credit scores inform sellers as to the creditworthiness of their customers. Second, small businesses can set their approval rates based on the credit score of their prospects and their tolerance for risk. Lastly, credit-scoring models enable a small business to continuously monitor the creditworthiness of its customers.
For more details about how it works, check out John Hayes’ byline on thestreet.com.
In light of recent developments at CIT Group, one of the largest credit protection providers in the U.S., it is clear that there must be alternatives to traditional methods of trade credit protection. In today’s economic environment, it is simply insufficient to ask a potential customer for a credit application up front, check a few references, and fail to stay on top of an ongoing review.
That’s why FTRANS is migrating its customers to an innovative credit scoring model. This model uses front-end credit data to qualify a small business’s B2B customers, eliminating the need to purchase blanket insurance on all of a business’s trade credit. This strategy, similar to how B2C companies issue individual credit checks prior to extending personal credit, enables small businesses to make better- informed decisions on which customers are worthy of trade credit.
“In today’s economic environment, it is simply not enough to ask customers for a credit application up front and check a few references,” said Dan Drechsel, CEO of FTRANS. “At FTRANS, we’ve developed a model to help our customers determine the creditworthiness of their buyers. Small businesses need stability now more than ever and using a credit policy based on solid credit information is one way they can insure themselves without entirely relying on a third party.”
And FTRANS clients like it.
“We switched to a credit scoring model because we can’t afford to take a hit from bad loans and there’s no guarantee our credit will be fully insured by third-party lenders that may not be able to withstand the recession themselves,” said Mark Wecker, CFO of Southland Graphics. “FTRANS’ credit scoring policy is a simple, precautionary step I can take to ensure that I’m working with the right customers and protecting my business.”
