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GUIDE TO A STRONG AND EFFECTIVE CREDIT POLICY

GUIDE TO A STRONG AND EFFECTIVE CREDIT POLICY. Gary W. Koch With Offices In: Gislason & Hunter, LLP P.O. Box 458 Des Moines, Iowa

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GUIDE TO A STRONG AND EFFECTIVE CREDIT POLICY

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  1. GUIDE TO A STRONG AND EFFECTIVE CREDIT POLICY Gary W. Koch With Offices In: Gislason & Hunter, LLP P.O. Box 458 Des Moines, Iowa 2700 South Broadway Mankato, Minnesota New Ulm, MN 56073 Minneapolis, Minnesota gkoch@gislason.com New Ulm, Minnesota (507) 354-3111

  2. WHAT IS A CREDIT POLICY? • A guideline for making decisions to extend credit to a customer • Goal is to avoid non-payment when credit terms are offered to a customer • Credit Policy directly affects cash flow:  Too strict-lose sales  Too lax-lose repayment • An effective credit policy will attract and retain good customers without negative impact on cash flow

  3. ELEMENTS OF A CREDIT POLICY • A continuum of choices • At one extreme-cash up front; At the other-pay when you can • To pick the right policy for your business, the credit policy needs to address the following questions:  What types of credit are offered?  To whom is credit offered?  How much credit is offered? • Answering the foregoing questions requires input and buyin from each segment of the company’s credit team 3

  4. THE CREDIT TEAM • Sales and Marketing  Most in touch with credit terms that are competitive in the industry  May be too generous with terms in order to retain or attract business • Accounting and Internal Controls  Most sensitive to matching revenue with company payment needs  May be reluctant to take business risks necessary to retain or attract business • Senior Management  Reconcile sales/marketing with account/internal controls  Recommended Final Policy to the Board 4

  5. THE CREDIT TEAM • Board of Directors  Ratify Policy  Provide regular oversight regarding implementation  Require all levels of the Company to abide by the Credit Policy • The Board must require unity of purpose within the Company in enforcing the Credit Policy  Avoid customer attempts at an end runaround policy  Predictability is an important marketing tool  Changes to Credit Policy should be analyzed and approved at the Board level – not done ad hoc by management 5

  6. TYPES OF CREDIT - INDIVIDUAL • Changes in the rural economy include more “consumer” type credit – e.g. rural homesteads and home heating gas/oil • Consumer type debit is generally at lower individual levels • However, “consumer” credit may also mean that the customer has protections that are not available to business customers  Example: Interest changed on past due accounts may not be “usurious”  Example: Procedures used in collection of accounts may have to comply with “Fair Debt Collection Practices Act”  Example: Greater restrictions on credit checks • In developing credit policy, “consumer” type debt must be managed so that the company complies with applicable legal requirements 6

  7. TYPES OF CREDIT - BUSINESS • What is your Company’s strategic and operations requirements?  Increased sales  Increased Profitability  New Customers  Increased Market Share 7

  8. TYPES OF CREDIT – CREDIT CHOICES • Contracts with Third Parties • Open Account – Trade Payable  No debt instrument – a promise to pay without specified terms • Type of Credit – line of credit  Promissory note – establishes basic repayment terms • Type of Credit – Third Party Guaranty  Backup for the customer promise to pay • Type of Credit – Secured Debt 8

  9. TYPES OF CREDIT • Examples of Credit Risk  Third party contract – prepayment by your customer – your prices rise after prepayment  Third party contract – Grain Delivery Contracts with your customer – customers refusal to timely deliver  Sale of goods such as feed – Decline in profitability of your customer’s operation puts your company at risk for non-payment 9

  10. TO WHOM IS CREDIT OFFERED? • Existing Customers • New Customers • New Areas of Business 10

  11. TO WHOM IS CREDIT OFFERED? • Credit History and Information  Applications for Credit  Who is the Customer ► Entity ► Individual  Financial Statements ► Current balance sheet ► Current income statement ► Previous year’s financial statement  To whom does the Customer owe money?  Location of Customer’s business/assets  Credit Report 11

  12. HOW MUCH CREDIT IS OFFERED? • Analyzing the size of the credit needed by the customer • Does the income statement show ability to cash flow? • Does the balance sheet show customer ownership of assets with sufficient equity? • Can the customer obtain guaranties of payment with respect to credit which has been extended? • Will the customer offer collateral to secure repayment? • Are the customer’s lenders willing to offer letters of credit? 12

  13. DEBT RECOVERY • Monitor Repayment • Enforce procedures for contacting customer if payment is late • Maintain communication with customer – do not rely solely on letters / e-mails • Engaging counsel • Legal enforcement of remedies with respect to a defaulted contract • Legal collection of an unsecured debt • Legal collection of a secured debt • The role of Farmer – Lender Mediation • Ramifications of bankruptcy 13

  14. EXAMPLE 14

  15. EXAMPLE 15

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  17. EXAMPLE 17

  18. THANK YOU Gary W. Koch Gislason & Hunter, LLP P.O. Box 458 2700 South Broadway New Ulm, MN 56073 gkoch@gislason.com (507) 354-3111

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