more-arw search

Q&A Forum

Credit Risk Management Process Needed

Credit Risk: I need to develop credit risk policies and procedures for my company. We are not a bank. I'll need to underwrite ~ 20 new clients each month with credit exposure ranging from a few thousand to $100k. Any suggestions on training material?

Answers

Jean pierre Manon
Title: Director
Company: Rinaca
(Director, Rinaca ) |

For the biggest exposure I suggest

1 set up a credit limit for each one of these customers based on turnover /terms and profit margin and specific risk if you don't have the capacity to analyze each one of them you can rely on Duns information and get also imput from the sales force
2 get an aged trial balance by 30 days bucket and closely monitor these and do send this information to the sales force
3 if a customer is over credit limit / past due consider stopping shipment above all is your product is fungible and titled has passed to the customer despite the invoice is unpaid

4 you should make sure that sales deduct / returns etc are promptly posted to the account otherwise , sales will argue above stopping shipment

The successful policy need involvement of the sales force and a good comprehension of how is important your product into the customers manufacturing process ( homologations for example in OEM business etc )

Paula Batzer, MBA
Title: Accounting Manager
Company: EFULFILLMENT SERVICE INC
(Accounting Manager, EFULFILLMENT SERVICE INC) |

You need to first understand the risk your company is able to absorb -- due upon receipt, net 10, net 20, net 30, etc. Also look at the requirements of the companies you will be working with -- meaning what do they need as far as turn around time on payables? Ultimately though, it depends on your cash flow. If you do not have the cash to support longer payment terms, you need to either look at prepaid, shorter terms or possible interim financing. You also want to evaluate the risk of the clients and how well established they are, their pay history, credit references, D&B score. Also, look at establishing terms that secure what you are selling if it is more valuable product like large equipment/machinery. Definitely keep the company within the required terms you set up for them. This minimizes the additional risk that can happen when things are left unchecked after the initial set-up.

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

Good advice from Jean Pierre and Paula. A company that offers credit terms to their customers is operating like a bank - or at least they should be when deciding credit issues.

The tension between sales and the accounts receivable department is mitigated by having a policy in place where sales can submit a potential customer for credit evaluation early in the sales cycle. Good salespeople will adopt this policy and learn whether to pursue the sale.

I tell entrepreneurs, "Anybody with bad credit will gladly buy what you have on credit." The trick is to determine whether they can afford it.

Bradford Marcus
Title: BDO/Account Executive
Company: Atwell Companies, The
(BDO/Account Executive, Atwell Companies, The) |

Good advice from all three. There still companies that use credit references.
They are almost always a waste of time since they are their best customers, best friends, and family members. If you finally reach the references you know what the answers are going to be. The information is not reliable.
The credit application/new account form should also include email addresses and cell phone numbers. I suggest you add this phrase or something similar:Should an invoice be sent to a collection agency,the debtor will be liable for any fees charged to collect that debt including legal.
It is in the best interest of your sales department to make sure they are completely filled out, signed and dated since no account should be considered for credit.

Teach your sales department your procedures and tell them why it is necessary. Establishing standard operating procedures saves time, reduces problems and increase cash flow.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I agree with most of these recommendations except D&B references.

Both D&B and the quality of their data are extremely suspect. D&B's business practices, which have been the subject of many a post on Proformative and elsewhere lead me to believe all their activities are suspect.

Just as you are trying to gauge the character of your client, and issues and behaviors found in their history will color the amount of credit you are willing to give, D&B behavior is in my opinion so corrupt as to color anything they may say.

BTW, CreditSafe isn't much better. There hard sell push is both obnoxious and fraught with the same dangerous omnipotent pronouncements that they know all about every company.

Ernie Humphrey CTP
Title: CEO & COO
Company: Treasury Careers
LinkedIn Profile
(CEO & COO, Treasury Careers) |

We can all jump in here and tell our D&B "horror stories", D&B not so good. Direct contact with business references and a direct look at company cash flow is best, and should be required of any supplier or customer that can impact your company in any meaningful way given the scale (or potential scale) of your company's relationship with them.

2179 views

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.