How to Incorporate Credit Risk Management in Business
When budding entrepreneurs decide to be the next Mark Zuckerberg, dreaming of creating a vast business empire and billions in sales, the last thing they usually think about is the financial risk to their business and to them personally. Some may find the thought of managing financial risk daunting, but it should be straight forward.
Having credit risk processes in place from the outset is ideal, but credit risk management procedures can be implemented at any stage to reduce your exposure to risk of bad debt write off, improve cash flow and protect your profit
Below are a few methods to use for managing credit risk. The decision making process for granting a potential customer credit should be made up of a jigsaw of several different types of information, rather than relying on one method only.
Methods for Credit Risk Management in Business
Credit Application
Credit application forms are suitable for some businesses, such as trade counters or stationary companies. Other types of business may not feel it’s appropriate to ask their customers to complete a credit application form, therefore the sales teams should be given the responsibility of collecting the same information from the customer using a ‘New Customer Check List’.
The minimum information gathered should include:
- Full legal entity name
- Company registration number
- Registered address of a company;
- Any trading styles if the differ from the full legal entity name
If you are trading with a sole trader or unlimited partnership, you will need to get for the proprietor or each of the partners:
- Trading address
- Trading style ( e.g. Jones & Smith, The Smithonian Restaurant) )
- Full name of the proprietor or each partner
- Their full home address
- Their date of birth
- If you are supplying goods that are for your business a high value, or they want a high credit facility, we advise you also check photo ID and obtain a personal utility bill dated within the last 3 months to confirm they are who they say they are and they do reside at the address given
These details are essential if a business relationship goes awry and you find yourself taking legal action to retrieve money owed to you. County courts across the country are bursting at the seams with unenforceable judgements because the wrong legal entity had been used.
You night also want to take this opportunity to ask your customer to sign agreement to your terms and conditions of sale, its an obvious add on to a credit application form or it can be added to the sales onboarding process with the addition of the task to the New Customer Check List.
Credit Checks
Does your customer have the ability to pay you when all is said and done? I have come across so many companies that have a fantastic sales team in place that bring in masses and masses of work, but don’t think about the end result, actually getting paid!
Getting a Credit Agency Status Report on your potential customer at the outset, before any goods have been delivered or work has been carried out, will give you an indication of their financial worth, if they have any County Court Judgments against them or have other adverse indicators.. Be aware, however, that the Report is only a snapshot of that particular moment, there is always a possibility that this could change.
Monitoring
As a Credit Agency Status Report does not indicate the future credit score of a customer, ongoing monitoring is essential to monitor risk with a customer. You will receive notification of anything remarkable regarding your customer, this could be that they have received a CCJ or have filed their accounts late, or possibly that they have increased profitability, therefore enabling you to extend a higher credit facility to them.
Trade References
Trade references can be a useful tool in determining the credibility of a potential customer, however be aware that companies will often use their ‘pet’ suppliers who get paid on time each month, whilst other customers are kept waiting. If a company refuses to provide a trader reference for a potential client, consider this to be an enormous red flag.
Quick Action
Obviously bad debt is not good business, so you should always look to minimise this risk. Quick action should apply to every aspect of the customer relationship. If you customer has a query, answer it, if your customer has a dispute, resolve it as quickly as possible and if a customer is late in payment, ensure you chase immediately. When there is an issue with a customer that is preventing payment, you should always do your utmost to resolve the issue amicably, not least for the ongoing relationship with your customer but also to ensure you comply with the County Court’s Pre Action Protocols. Once it is clear you will need to take further action to get paid, do so quickly; the longer the debt is outstanding, the harder it is to collect.
The techniques I have outlined for credit risk management in business are just some of the options available to you. There are, more obvious indications that working with a customer could be risky business (bailiffs carrying computers out of their office is a fairly strong indication of customer failure!); but much of the time the risk associated with working with a customer is more difficult to spot; handling these risks in the correct way is where the real challenge lies.
We can help you to manage your credit risk with our Credit Management Support Service; our support package includes, credit risk reporting with ongoing monitoring, unlimited email and telephone advice and much more – find out more today
