You have lost money on a customer which could have happened in many ways: they went out of business; they sold their business and the new owners won't take responsibility, they went out of business; or they filed bankruptcy. It doesn't really matter, because at the end of the day your company took a financial loss. Now the customer (or least the principal owner) is back and wants to do business with you again. This situation never fails to amaze me on so many levels. Was the customer hoping that I would forget who they are? The same goes for sales. Usually it is with a new sales person, but not always. Most of the time, the customer usually views the prior loss as not their fault. No matter what the situation, this customer is now knocking at your credit door.

In this economic environment of consolidation, reorganization, new competitors, new ways to sell and the overall difficulty of maintaining a healthy bottom line, it is not always black and white as to whether you sell on terms to this "repeat" customer.

In the past my company has always had the hard line policy that if we lost money on a client due to bad debt, they are cash in advance, period.

At the ICEL meeting "Ask the Experts" panel discussion, I posed this question to the panel: When and how do you determine to give a client credit terms for which you have sustained a financial loss?

I believe giving credit where credit is due. The answer came from Erik Wright, CBF, Spectrum Engineers, Inc. Evaluate whether to extend credit after the client has done enough business, cash in advance, to cover the bad debt, plus the profit margin on the loss. This seemed like a perfectly logical approach. It takes out all the past baggage, gives a benchmark, an opportunity to sell, and maybe build a stronger, new business relationship. 

If your company took a bad debt loss of $100,000. They have come to you with some solid business opportunities with which your company would like to partner. Obviously, ask for cash in advance. Upon which, oddly enough, your sales department and client are just fine. They completely understand. Whew, dodged that bullet. For now.

A few years have gone by and both the client and your sales department think it is time to open the client up with credit terms. Being a credit manager, my question is, "Have you not forgotten the $100,000 loss?"

Let's put Erik's suggestion into action. Let's assume that your profit margin is 5%. The client would have to purchase $2,000,000 in cash in advance purchases, assuming the 5% profit margin, to break even with the previous bad debt loss.

This is the benchmark. And, in this scenario, it has to have an established a pattern of consistent purchasing over at least a one year period of time. So, that gives me another workable benchmark.

Now that the client has met the three benchmarks, we have decided to extend credit terms and watch them like a hawk. You know that old saying; "Fool me once, shame on you; fool me twice, shame on me."

A very wise sales manager (and good friend) once told me to look at every obstacle or problem as an opportunity. This is a great example of an opportunity to show your worth as a credit manager.