50 Ways to Better Manage Credit Risk in the New Year

By Michael C. Dennis. CPC, CCP, CBF

Managing credit risk is essential for sustainable growth and financial stability.  Here are 50 ways to do so in the New Year…

1. Establish clear credit terms, limits, and procedures for consistent evaluation.

2. Use standardized forms to gather crucial customer financial information.

3. Regularly obtain credit reports from reputable agencies for new and existing customers to make better informed decisions.

4. Scrutinize customer financials to assess stability and payment capacity.

5. Regularly use financial ratio analysis to measure and monitor your customers’ financial health.

6. Verify customer creditworthiness through direct communication with their bank.

7. Contact other suppliers to better understand applicants and customers’ payment history.

8. Utilize statistical models to objectively assess credit risk.

9. Periodically reassess customer creditworthiness to proactively manage credit risk.

10.               Set appropriate credit limits based on risk assessment and financial strength.

11.               Rigorously enforce your early payment discount policy.

12.               Ensure accurate and timely invoicing to prevent payment delays.

13.               Ensure credits owed to customers by your company are issued promptly.

14.               Ensure that payments received from customers are posted promptly.

15.               Offer incentives for early payments to improve cash flow.

16.               Implement automated reminders for overdue invoices to streamline collections.

17.               Establish a clear collections process with escalating actions for late payments.

18.               Use dunning letters to remind customers about past due balances.

19.               Make direct phone calls to customers regarding overdue payments.

20.               Limit authority to accept payment plans with struggling customers within the credit department.

21.               Pursue legal action as a last resort for uncooperative debtors with large amounts owed.

22.               Use third party collection agencies to collect smaller amounts owed by seriously past due customers.

23.               Consider purchasing credit insurance to protect against bad debt losses.

24.               Secure sales made on open account terms with collateral to mitigate potential losses.

25.               Obtain personal guarantees from business owners for added security.

26.               Obtain inter corporate guarantees for the same reason.

27.               Stay informed about industry trends for early warning signs of customers struggling.

28.               Compare customer financial performance against industry benchmarks for better risk management insights.

29.               Compare the credit department’s performance against industry benchmarks to assess your effectiveness.

30.               Consider adjusting the prices charged to customers based on the credit risk associated with selling to them.

31.               Provide ongoing training to credit team members about credit risk management best practices.

32.               Maintain thorough documentation of credit decisions and collection efforts.

33.               Implement strong internal controls to prevent fraud.

34.               Define the organization's acceptable level of credit risk.

35.               Leverage technology for automation, data analysis, and improved efficiency.

36.               Analyze that data to identify trends, patterns, and potential risk factors.

37.               Use predictive modeling to forecast potential credit losses.

38.               Monitor economic forecasts for potential impacts on customer creditworthiness.

39.               Consider political risks carefully if you are an exporter.

40.               Ensure the credit department is in compliance with relevant regulations and laws.

41.               Regularly review and improve credit risk management processes.

42.               Maintain open communication with customers to resolve issues promptly.

43.               When necessary, pursue negotiated settlements to maximize debt recovery.

44.               Adjust credit limits based on real-time customer performance and market conditions.

45.               Implement automated holds on orders for overdue accounts to mitigate further exposure.

46.               Train sales, customer service, and other departments on credit risk awareness.

47.               Implement systems to detect early warning signs of customer financial distress.

48.               Periodically review and update credit terms to reflect changing market conditions.

49.               Perform thorough due diligence before extending credit to new customers.

50.               Prioritize customer retention strategies

By implementing these comprehensive strategies, businesses can minimize and control credit risk.