Question

Whether the economy is strong like it is now or weak like it was in 2007 to 2009, there will always be some customers who do not pay.

How do companies account for the possibility that some of their customers might not pay down the road?

Answer 1

Economy as of today is strong and it is shown by the lower unemployment rate that hovers around 4% and inflation rate that is just over 2% and real GDP is also growing over 2% on a consistent basis. Further, number of claims for the unemployment benefits are also decreasing. These indicators show that people are getting jobs, they have higher purchasing power and they can repay back to the companies. So, economy is in a better condition and it is also ratified by the Fed, increasing the federal fund rate.

It is always possible that some customers will not pay even in an economy that is very sound and robust. But, it is more related to not paying due to the intentions, rather not paying due to the lack of capabilities. Hence, scope of default risk will always be present and companies should analyze the past credit history, historical bank account details and physical follow ups to minimize the risk.

Companies can account it on the basis of determinant analysis technique that is a multi-variate analysis, used to identify the credit score on the basis of income, past purchasing history, financials and other information collected by the analyst. A higher score means higher reliability and vice versa. Besides, companies can collect information about the customers from different sources such as banks and reference people. It will help companies assess the customers regarding their willingness to pay or not.