Over the course of my career I have heard many people downplay the obvious credit risks in some of their clients, taking comfort instead in their prompt payment on previous dealings. Are these companies playing it smart or taking risks with their assets?

One of the first things I learned in my career was that there are two key determinants in establishing credit:

1) Ability to pay, and

2) Willingness to pay.

Ability to pay is quantitative and fact based.

Willingness to pay is more speculative, as it depends on intangible characteristics of the customer. In this respect, timely payment is a good sign; that said, how do you know that the company can continue to make the payments? In some cases, they can't; there are enough cases around of companies meeting their payment obligations only to file for bankruptcy protection shortly thereafter to cause concern.

What it comes down to is that to truly establish good credit, you need both attributes to be present - anything less and the risks have just increased.