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The first moment Credit Risk happens

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Credit risk is the probability of not getting paid, simple. Some business owners think that just having some special clauses in their terms of trade is all they need to do but there’s more involved.

When you offer anyone credit you are entering into a whole separate debt agreement. It’s no longer just providing goods and services and the warranties which come with that. When you offer credit (to anyone, even friends) there is an expectation that the borrower will repay the loan in good faith – in other words as quickly as possible. But many things can get in the way and the credit component of the transaction can get awkward.

If you lend money to a friend or family member you would already have a good level of knowledge about their finances and their character – obviously they are trustworthy. What would you think if they went out and bought a brand new Toyota Landcruiser for their family but still hadn’t paid their loan back? Would it start feeling a bit worse if they said that business or their job wasn’t going well right now?

Credit Risk Tactics and Procedures

One of the most common credit risk management tactics used by many trades business like Air Conditioning installers is to expect a deposit for a certain percentage of the value of the quote.

Air conditioning installers need to purchase the air conditioning units before they install them and once they are installed it is very hard to uninstall them or remove them from the property. You will want it to be very clear to your customer that you own the goods until their invoice is paid in full and this component of the credit risk management process is called “Retention of Title”.

What happens if you retain the title but then try to go and get your air conditioning unit after it is installed? Are you even allowed to enter those premises without the consent of the owner? I’m not even going to go there in this blog but you can probably see how murky the whole credit management process can get very quickly.

What would Gerry Harvey do?

The trouble is how to enforce your rights if you have a difficult client? Harvey Norman sells Air Conditioning systems and organise installation for you but takes the full payment up front (or puts you on a payment plan).

Do you know how they make sure they are paid? By clearly in their terms and conditions “exactly what work will be done by the installer” and taking the payment up front. Anything work or parts that are needed over and above these specifications is charged separately by the installer to the customer.

Central Coast Air Conditioning installation company Earleys Electrical have used a similar formula to provide accurate quotes for a new air conditioning system installation. This enables them to quote quickly and accurately whilst not being left out of pocket if the installation costs blow out.

Aldi offers a fully installed toilets with no credit risk

Aldi regularly have an offer for a brand new toilet fully installed for $299. This is not an example of credit risk for Aldi but you can bet the installer needs to make sure they cover their backside to ensure the work is performed correctly and according to the clearly defined specifications.

What happens is the installation is included in the price where there is a perfect installation scenario. Any variations will incur an extra cost in time and parts.

I’m mentioning this in this blog post to demonstrate how the large successful businesses try to remove ALL or ANY risk from every sale and make sure they are paid up front. Watch the training video about the cash conversion cycle to understand why this is important.

When a Customer Accepts a Quote

Your terms of trade and credit risk management information needs to be on your quote as this is your “Offer document” and when the customer accepts your offer and pays a deposit you have a legally binding agreement.

The fact that you have a retention clause and credit management information in your terms of trade ensures that you have been diligent in ensuring the customer knows about, understands and agrees to your terms of trade.


EzyLearn’s Daily Transactions Training Course comes in Xero, MYOB and QuickBooks Online versions. It includes every aspect of the selling process from buying products, providing a quote, accepting a quote, invoicing and receiving payments. It helps you identify the exact moments where you need to insert or apply credit management principles.

Daily Transactions Courses in MYOB, Xero and QuickBooks Online

The Credit Management Training Course will teach you how to manage your credit risk before a sale is made, during the provision stage and after completion, even if you need get legal with customers for not paying:

Credit Management Training Course (watch the free training video)

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