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TheStreet Open House

CIT Turmoil Highlights Credit-Scoring Policy

Stocks in this article: CIT

John B. Hayes is the chairman and co-founder of FTRANS, an Atlanta-based provider of accounts receivable and credit management services for small businesses. He is the author of "Use the Credit Crisis to Grow Your B2B Business."

ATLANTA ( TheStreet) -- The recent financial troubles at CIT Group (CIT - Get Report) have ignited serious fears among hundreds of thousands of small businesses that have financial relationships with the company.

With the small-business economy already suffering due to limited access to credit and capital, insufficient bank lending, inadequate government stimulus and a decrease in net revenue, the extinction of the nation's largest credit-protection provider would have created another major economic setback. Thankfully, the infusion of cash by CIT's bondholders will likely provide the company with enough equity to avoid filing for bankruptcy at this time.

Although this is fantastic news, not just for the small-business economy, but for the economy as a whole, the near failure has caused some small businesses to reevaluate their source of capital and customer-credit policies. As Victoria Knight of The Wall Street Journal wrote: "The troubles at CIT underscore the importance of developing back-up plans for borrowing." The troubles at CIT also underscore the importance of understanding the credit of your customers.

So what can small businesses do on their own to avoid being caught by bankruptcy or another failure to pay by a customer?

Develop an independent credit-scoring model: In today's economic environment, it's simply insufficient to ask a potential customer for a credit application up front, check a few references and stick a copy of its financials into the filing cabinet. Whether a business is selling to a small or large company, it's important to stay on top of the creditworthiness of every client, vendor or customer. After all, our economy is littered with thousands of companies that have failed to diligently understand the financial condition of their customers.

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