Tips on Extending Credit to Newly Formed Companies

When considering extending credit to a newly formed company, you can:

1. Ask the new company to arrange for its bank to issue a documentary letter of credit
2. Ask the newly formed customer to arrange for a standby letter of credit which is a secondary payment mechanism. Standby L/Cs are drawn on by the beneficiary/creditor only if the debtor company fails to pay the creditor company
3. Require the new business to pay C.O.D. on small orders, and cash in advance on large or custom orders with the understanding that after three to six months of purchasing on C.O.D. and C.I.A. terms that the customer will be reevaluated for open account terms
4. Ask the debtor to pledge one or more assets and then perfect the security interest in the pledged collateral
5. Purchase credit insurance on the new account
6. Consider selling the receivables from this new account to a factor.  Factoring occurs when a factor purchases accounts receivable from a creditor at a discount and takes in return an assignment of the accounts receivable
7. Ship merchandise on consignment to the newly formed company so that you as the seller retain title to and ownership of the merchandise. In this scenario, you should perfect a security interest in its inventory to reduce risk
8. Require a personal guarantee be sign by the new business owner, or by one or more officers or directors of the company
9. To reduce risk, require an advance payment sufficient to cover the cost of goods sold
10. To eliminate credit risk, require payment in advance by wire transfer from the newly formed company [a FedWire]

© 2009 by Michael C. Dennis.  All Rights Reserved.