Credit Management Best Practices
No two businesses are alike. That’s why your business needs a credit management plan tailored to its needs, industry and customers. That said, experts agree that effective credit risk management best practices include optimizing contract management and accounts receivable collections, identifying and analyzing the risk of new clients defaulting on payments and creating a proactive credit risk mitigation plan.
Credit Management Begins with Contract Management
When it comes to contracts, be sure to state in writing the delivery and payment conditions, and also discuss any provisions in the agreement. This is where you can indicate whether certain conditions apply and that you do not accept any other conditions. As a starting point, you can check with your trade association for the conditions typically used by your industry. Upon entering into the contract, we also advise asking a lawyer to review the conditions. It also may make sense to be up front with your customers and make them aware in your contract and invoicing that you are credit insured. Doing so makes clear that there are greater consequences in the event of late payment or non-payment.
Also, verify that the person who signs for each receipt has the proper authority and ask for a company stamp on the receipt.
Credit Management & Accounts Receivable Collections
When collecting accounts receivables, be sure that all key data appears on your invoice so it doesn’t hold up the payment. Here’s a rundown of the basics to include:
- Your company name, address and telephone number along with a contact name
- The right company name and address of your customer and the right customer contact person
- The nature and quantity of the goods or services
- The price in the appropriate currency
- The agreed-upon payment period
- Your bank account number
- Also print your terms on the back of the invoice
If payment has not already been received, calling customers right before or on the due date of an invoice can be handled by the accounting department or the sales department, depending on the relationship with each customer. This call confirms the products you delivered and that the invoice has been received. In addition to facilitating the payment process, this step also provides good customer service to make sure everything is OK. This step can also prevent late payments if your client is not satisfied with the delivery— while there’s still time to rectify the issue. You can even consider offering your customer a small discount if they pay by the due date.
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How to Develop a Strategic Credit Management Procedure for Late Payments
Not all customers pay their bills within the agreed-upon payment period, so be sure to have an effective credit management policy for late payments. In the event of late payments, call the customer and follow up with a written reminder that you are expecting payment within a reasonable time, such as one week.
If payment still does not come through, you can then send a warning and eventually a formal written notice. This typically asks for payment within two business days and presents a specific date by which the money must be received before legal proceedings will commence. Given the costs associated with late payments, also consider adding fees to account for collection and interest costs.
In the event that you enter into an agreement for a late payment schedule, put the terms of the agreement in writing and clearly note the following:
- The total amount due
- The payment periods
- The specific dates on which payments must be received
- Your bank account number and other routing information—if payments will be wired/transferred electronically
With a credit management system , you should also monitor the customer’s progress. Are they complying with the rules? Is there any possibility they are on the verge of bankruptcy? Also, inform your credit rating agency. Late payments by your customer may have implications on your own creditworthiness, which underscores the importance of having a credit control procedure in place. Being credit insured means your carrier will handle follow-up and collections of late payments, which, in addition to saving you time and effort, can also help preserve your customer relationship by removing you from contentious discussions.
Begin the Credit Management Process By Researching the Creditworthiness of Customers
We advise researching new customers when you start talking to find out as much as possible about the company you’re doing business with. Consider various information sources for your customer credit analysis, such as the local Chamber of Commerce and credit bureaus, bank and trade references, company 10K, etc. Even existing customers should undergo periodic reviews. Being proactive during the research phase plays an important role in the credit management process.
Of course, the gold standard data for understanding your customers' financial position is their audited financial statements. Some privately held customers may be willing to share these with you upon request, but many will not. If you have a credit insurer, your odds of having indirect access to these statements increases - customers respect the market power of an insurer and they typically offer confidentiality agreements to put them at ease that specifics will not be shared with the end customer. A customer credit vetting tool like EH TradeScore can help. Learn the financial health of your customer today!