Tips to Manage Credit Risk in Your Business

The current economic environment may have you looking to diversify your business with new customers in new markets. If you will be extending credit to those customers, managing credit risk will be crucial for maintaining the financial health of your business.

While I have been an Accounts Receivables Insurance specialist for the last 25 years, earlier in my career I was a National Credit Manager for a Canadian corporation. Taking that collective knowledge here’s a seven step structured approach that can act as a framework to help manage credit risk in a way that functions to benefit both the business and customers. 

1.     Establish a Credit Policy 

This is an important document as it establishes who your company grants credit to and defines how granting credit operates in your business.

·       Set clear criteria for who qualifies for credit. 

·       Define credit limits, payment terms, and consequences of late payments.

·       Align the policy with your business's risk tolerance and industry norms.

·       Ensure you have a valid, fully completed Credit Application at all times. 

NOTE: A completed Credit Application must give you the correct legal name of the company in case you ever have to file a legal claim against the company. You don’t want the trade name of the company. It should be the name that ends in Inc. or Ltd or some other version.

2.     Assess Customer Creditworthiness 

·       Conduct credit checks using credit reporting agencies and trade references. 

·       Review financial statements (determine what level of Credit is required), bank references, and payment histories. 

·       Use internal scoring models or third-party tools to rate credit risk. 

NOTE: Do not be afraid to ask for financial statements to assess credit. Secured Creditors see this information monthly or quarterly. For the most part you are an unsecured lender so having access to this information is imperative.

3. Monitor Existing Credit Exposure 

·       Track outstanding receivables regularly. 

·       Set up alerts for delayed or missed payments. 

·       Review customer credit limits periodically and adjust based on behavior. 

·       Use your internal software to track overdues and deal with them as quickly as possible before your competition does. 

4. Diversify Customer Base 

·       Avoid over-reliance on a few large customers. 

·       Spread credit risk across different sectors, regions, or industries. 

5. Use Risk Mitigation Tools 

·       Require collateral or personal guarantees where appropriate. 

·       Use trade credit insurance to protect against non-payment. 

·       Consider non-recourse factoring or invoice financing to transfer risk. 

6. Enforce Collections Promptly 

·       Have a proactive collection process that involves all members of the organization. 

·       Offer early payment discounts or impose late fees as incentives/disincentives. 

·       Escalate delinquencies to debt collection agencies when necessary. 

·       The old saying,“it is not a sale until the cash is in the bank” still holds.  Your sales team should be aware of overdue situations and be of assistance in collecting. Consider not shipping your customer’s next order until payment is received. See point 7. 

7. Leverage Technology 

·       Use ERP or accounting software with credit risk management features. 

·       Automate alerts, risk scoring, and collections to reduce human error and increase efficiency. 

·       Manage shipments to overdue customers or those over their credit limit. 

As I mentioned at the start, managing credit risk is crucial for maintaining financial health in any business but so is maintaining good relationships with your customers. A credit policy outlines what is expected from both parties so there are no surprises. But sometimes bad things happen to good companies. That’s when a trade credit insurance policy can backstop your credit risk management process.

Reach out if you have any questions.

Mark

mark@elevateglobalinsurance.ca