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 A lot can happen in a year - and out of date financial statements may provide the credit department with a false sense of security.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 calls.

• Insist/require/demand that your collection staff report to you any problems they encounter including:

  • Disconnected phones

  • 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 Edition