[Rocky Thomas]

Hi everyone

One of our members has asked if anyone uses a weighted metric based on financial statement analysis to establish credit limits. For example – 10% of Net Worth,  10% of Working Capital, 10% of EBITDA, etc.

Thanks

[Frank HemleKeymaster]

Hi,

We do review financial statements but we do not establish credit limits.

[Tim Bastian]

Hi Rocky,

As currently stated there is not enough information to determine the risk of a given line limit. Considerations would include:

• Average order size or project the company is currently doing with all other customers.
•  Credit worthiness of the prospect, time in business, high credit lines elsewhere, average credit lines elsewhere.
• Leverage to secure the transaction, lien rights, personal guarantees, payment bonds, potential to reclaim goods, UCC filing to secure transactions (if in the US).
• Funding source for purchase or project, owner, lender.

Not a one size fits all answer. The appetite for risk is a C-suite discussion along with potential upside opportunity for the deal. You can through regression analysis or your current customer data and based on pay habits look for those indicators that may tie to your customer base. At the end of the day this came be a long term effective recommendation but the rest of the work must be completed for good decisions.

 

Tim

[Edwin Bell]

Hi Rocky,

As was stated above by Tim, Grainger did/does not establish a credit limit based solely on the financial analysis. Other factors were/are needed in order to determine the appropriate amount of credit to address the customer’s needs. Tim has covered this topic pretty well in his answer.

Ed

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