Ten Ways to Help Mitigate and Control Credit Risk
By Gregory Dennis
In light of the problems in the economy, problems in the stock market,
problems associated with lack of consumer confidence, and the increase
in the number of business bankruptcies being filed - credit managers
need to be even more careful about controlling credit risk. Here
are ten ideas to help you to reduce risk - starting today:
Increase your department's participation in industry credit groups
to gain additional insights about existing customers as well as
potential new customers.
Become more insistent about applicants signing personal guarantees
as a condition of extending open account credit terms - especially
to businesses that are fairly new.
Request or require that customers provide financial statements
more frequently than once a year. A lot can happen in a year
- and out of date financial statements may provide the credit
with a false sense of security.
If you are selling to a subsidiary of a company, and the subsidiary's
financial condition or payment pattern is "disturbing" request
or require the parent company to sign an inter-corporate guarantee.
Increase the frequency of calls relating to past due balances,
and eliminate grace periods before making the first of these collection
Insist/require/demand that your collection staff report to you
any problems they encounter including:
Customers that will not accept their calls
Customers that do not return messages
Unrealistic payment commitments
An outright refusal to make a payment commitment
Customers that refuse to pay large past due balance because
of small dollar disputes.
Be more willing to use order holds as leverage to extract payment
from a customer that has not made a payment, or even offered a
reasonable payment commitment.
If an account becomes seriously past due [for example more than
30 days past due] do not return to "business as usual" once
the past due balance is paid. This situation should automatically
trigger a review of the customer account before a decision is made
about whether or not to continue to offer open account terms and
at what credit limit.
Consider using credit insurance to help prevent catastrophic
losses - but remember that credit insurance is not a cure-all.
Usually, there are a number of customer accounts for which coverage
will be denied in full or in part by the credit insurance carrier.
Work closely with sales to determine the expected level of sales
to each customer. Work proactively to try to qualify customers
for the credit limits they require - and when you are unable
to extend amount of credit requested make sure that the salesperson
knows both the credit limit and the reason[s] for your concern
about their customers' financial health and/or payment problems.
© 2002 All Rights Reserved
Reprinted with permission from the Covering Credit Newsletter 7/24/02