To Extend, or Not to Extend?

Know Your Customer
Knowing your customer’s financial stability and track record are crucial. Large or small, a company must have the ability and cash flow to sustain itself. As most credit professionals know, insolvency can strike firms of any size and have a devastating ripple effect.

There are a number of sources to obtain information on a customer’s creditworthiness, such as credit agency reports and bank references. Credit agencies can provide information on a customer’s payment history, banking relationships, and financial performance. For the produce industry, Bates relies heavily on Blue Book for timely information on pay performance and emerging trends.

“We check a customer’s background; we look at how long a company has been in business and dive into their financials,” Bates explains. “If what we need is not available, we will go with references, but we take them with a grain of salt.” She notes, however, that banks are generally a good source for references.

When calling a customer’s bank for a credit rating, standard questions include how long the account has been open, the average balance, and whether the bank has credit experience with the account. Bates says knowing the customer and understanding its reputation in the market are critical to making sound credit decisions. “We go back to the salesperson to find out what they know about the customer. It gives us a better level of comfort for the risk (we may undertake).”

Chiquita also looks at a customer’s operating plan. “We request a forecast of how much they intend to purchase, and we keep the amount of credit in line with the forecast and past history,” Bates says. Company policy is to set the credit line “to actual need as long as the financials support it. If there’s a spike in their credit line, it’s a trigger to us to go back to the sales person (to find out why).” If a customer is asking for more credit because the company doesn’t have the required cash, Bates says, such a spike “forces us to investigate to determine what the risk is.”

Not every customer has the financial stability to receive credit. “Most of the time we extend cash-in-advance terms if they don’t meet the criteria,” Bates said.

One advantage the produce industry has over others is the Perishable Agricultural Commodities Act (PACA). Sellers can participate in the PACA trust, which gives them priority status if a buyer becomes insolvent or files for bankruptcy, increasing the seller’s ability to recover outstanding debt. “Because PACA is very powerful,” Bates adds, “our numbers are lower than the general standard.”

Equal Credit Opportunity Act
Any business that checks into the creditworthiness of customers must be in compliance with the Equal Credit Opportunity Act. The Equal Credit Opportunity Act (ECOA) of 1974 applies to all creditors before, during, and after extending credit. Congress passed the Act in response to the difficulty minorities, women, and the elderly had in obtaining credit and requires that creditors “make credit equally available to all creditworthy customers” without discrimination. The Act also includes rules on certain notifications and record retention.