As one of the many debt collection agencies in South Africa, we are aware of the economic struggles of the country and how they can bring financial challenges into the lives of even the most successful businessmen and women.

This often leads businesses as well as private individuals down the path of unmanageable debt which.

However, where does this leave the creditor? After several months of non-payment, how can a creditor guarantee that their debtors are willing or even able to pay back their debts?

Apart from resorting to debt collection services, there are measures that creditors can put in place to ensure they are providing credit to people or businesses who have the capacity to maintain their monthly payments.

Credit Worthiness and Credit Risk

What is credit risk?

Credit risk is defined as the potential risk of loss a creditor (lender) faces should a debtor (borrower) fail to meet his or her contractual obligations.

Ultimately, it refers to the risk that any creditor may not receive payments or interest, resulting in an interrupted cash flow as well as increased debt collection costs.

Creditors wish to avoid lending money to any person or business with a high credit risk.

Although it is almost impossible to know who will end up failing to meet their obligations, doing a thorough credit risk assessment will minimise the potential risk.

Credit worthiness

Referring to the debtor’s willingness and ability to pay off the debt within the allocated time-frame, this is one of the deciding factors when granting credit.

The following are additional factors that creditors will take into consideration before granting credit:

• Positive background checks – Creditors will favour borrowers who have a good credit history and display moral character. A borrower should have a clean background with no evidence of criminal activity or consistent failure to repay debt.
• Size of debt – Creditors are more likely to grant credit to those who earn more than the demands of the debt repayment agreement. The amount of debt granted will be directly related to the borrower’s available resources.
• Length of commitment – There is more risk associated with longer-term agreements. Therefore, creditors will charge higher interest rates to cover the potential risks involved.
• Business reputation – Any business who has a bad reputation with other creditors should be avoided. Creditors should seek to grant credit to businesses that are held in high regard by the community and its customers

Granting credit to customers

Small businesses who wish to offer credit to its customers should consider the cost involved with granting credit when developing their credit policies.

In addition, the impact credit purchases will have on the business’ cash flow should be strongly considered. Companies need to ensure their ability to fully cover operating costs while carrying the consumer debt.

Furthermore, an important thing for a small business to remember is that there is no one-credit-policy-size to fit all. Each business must develop a detailed credit policy that is aligned and compatible with their long-term goals.

The following information about a credit applicant should be gathered during the decision-making process:

• Certified copy of Identity book/card
• Full name and surname
• Address
• Employment and income information (for private individuals)
• Financial statements (for companies)

The ultimate goal is to develop a well-informed assessment of the applicant’s reputation, financial situation, character and collateral circumstances.

Credit programs for business owners

The small business offering credit to business customers can use its sale force to obtain financial statements as well as trade references from potential debtors.

Local attorneys can also be used to investigate claims or actions pending against the applicant.

In addition, independent accountants can be hired to verify financial information provided by the applicant.

A full analysis of the company’s current assets, investments and debt can paint a clear picture of its credit worthiness.

Credit programs for private persons

Typically, credit bureaus are used when a small business wishes to evaluate the credit worthiness of an individual customer.

The bureau will have on record the consumer’s relationship with retailers, doctors, finance companies, banks and any other relevant credit provider.

These records are often condensed, providing a summary of results about the applicant.

However, the bureaus records may not always be up to date and so it’s important for businesses to use other resources when assessing an individual’s credit worthiness.

Able Tracers & Debt Collectors – Debt Collection Agencies in South Africa

We have been in the business of debt collection since 1965 and offer professional, effective debt collection services in South Africa.

Although creditors make every effort to ensure the credit worthiness of their applicants, there is always a risk that debtors will fail to honour their repayment agreement.

By using our debt collection services, you allow a neutral third party to navigate through the collection process.

This in turn results in a higher likelihood of successful collection, while maintaining a healthy financial status as well as good customer relationships.

For more information about our services, contact us.