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How Credit Managers Can and Should Use Credit Limits
Help streamlining the order release process
by Kym Price and Michael Dennis

Here are a few ways that customer credit limits established by the credit department can and should be used to help streamline the order release process while helping to control credit risk:

  • Establish a credit line for every active customer, including COD customers. Make certain customers are aware that credit lines can be changed from time to time, with or without advanced notice at the sole discretion of the credit department.
  • Always remember that credit line established for a customer is intended only as a guideline, and should not be used arbitrarily to deny credit to a customer.
  • It is important to update credit files and review credit lines at least once a year and adjust them based on the amount of credit risk associated with doing business with a customer. Major credit lines may need to be reviewed quarterly.
  • Work proactively with sales to determine what credit limit customers will need. Try to qualify customers in advance for higher credit limits. Why? Because it places a serious strain on the business relationship if orders are held by the credit department pending receipt of additional information needed to make an informed decision about whether or not to release the pending order.
  • Don't rely on personal guarantees to 'shore up' a high-risk account when establishing a credit limit. In a worst case scenario both the company and the individual guarantor will file for bankruptcy protection.
  • When establishing a credit limit for a high-risk applicant that is a subsidiary of a low risk parent company, recognize that a parent company normally has no liability for the debts incurred by its subsidiaries.
  • Don't over-use credit limits. Establishing appropriate credit limits will reduce the number of orders that end up on credit hold.
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