The scenario: A potential customer wants a line of credit to support his business selling concert t-shirts.
Knowing Your Customer or KYC is extremely important to prevent fraud and comply with regulations. KYC also enables you to provide your customers with superior service as you evaluate and assess potential loan and other non-credit opportunities—and the potential risks involved. Deep knowledge of a customer helps you determine the right solutions for the customer—and even whether your organization should pursue a lending relationship with him or her. What is an efficient, effective way to get to know a business customer? Ask questions tied to the business’s operating cycle!
When you get to know the business using the operating cycle as your guide, you focus on four key steps—how they purchase, produce, sell, and collect. These steps help you visualize how the business actually works.
For example, do they simply purchase completed t-shirts, mark the price up, and sell them outside of a concert venue to concert goers for cash or credit? This retailer would probably have very simple needs—most likely a small line of credit and an operating account.
But what if the business manufactures and distributes the t-shirts? In this case, the customer would be purchasing fabric, cutting the shirts to size, sewing them and adding concert decals on the front, then shipping goods to warehouses for distribution to large retail chains and collecting on invoices. This is a much more complex business that may require a variety of loans as well as treasury management and deposit products.
Each type of business has different risks—and different needs. If you don’t probe any further than what the customer tells you upfront, you can miss the mark with both the risk and the opportunity.
By asking good questions that are tied to the steps of the operating cycle you will gain a clear vision of what you need to do. This will allow you to better serve both your business customers and your financial institution.
Omega Performance’s core credit courses use the operating cycle to help you gain an understanding of the businesses that you work with and ask the right questions so that you can understand the larger picture. Contact us today to learn more!