Cost-effective Ways to Manage Credit Risk

There’s no shortage of websites that offer tips on collecting delinquent accounts. Many of them offer good advice – and sooner or later, you’ll probably need it.

But here’s probably the best method for dealing with slow payments or no-payment situations: keep them from happening in the first place!Tweet This

Regular customer credit checks are often the best way to identify potential credit risks before they affect your business. There are additional internal policies and practices you can put in place to help reduce the chance of delinquent payments. Here are five simple, cost-effective ways to help manage your collections and credit risk:

1. Craft a clear, detailed credit policy.

Don’t just assume your business partners will understand your expectations. Walk new customers through your credit policy, one step at a time. Go over payment terms in detail and be forthcoming about penalties, provided any such penalties are compliant with applicable laws– which may include the option of sending accounts to collections. Educate your employees, including your sales team, about your credit policies so that they can explain them to new clients.

2. Take your invoices seriously.

Believe it or not, the quality of your invoices can have a major impact on how customers perceive your credit policies. Create professional-looking invoices that provide clear, concise information on the amount due, payment terms, other important information and any legally required terms or information. In short, make it easy for business customers to understand how much they owe you and when you expect the debt to be paid.

3. Follow up on your invoices before they come due.

Many business owners contact their customers shortly before debts come due. A simple courtesy call to offer a reminder is appropriate, and may even help move your invoice to the top of the pile. Some business owners fear that this seems heavy handed; in truth, a personal call offers a chance to deliver quality customer service while building a relationship with your customer.

4. Keep accurate payment history records.

When business is brisk, you may lose track of who’s paid you. This is why it’s so important to keep impeccable records of your customers’ payment histories. If your business doesn’t have a dedicated accounts receivable employee, this responsibility may fall on you. There are many software programs that can help you log debts and payments, and they can remove a lot of stress from the bookkeeping process.

5. Know when to pull back on credit.

There are a variety of subtle signs that can indicate a business is struggling to pay its bills. Perhaps there have been layoffs or management changes. If you have one of Dun & Bradstreet’s business credit monitoring services, you may be notified that a customer’s D&B® credit scores or ratings have decreased. If you wait until a business customer is delinquent to change or withdraw its credit terms, you’ve already exposed yourself to risks. If the business’s credit profile shows a sudden rash of late payments to other vendors, or evidence of cash flow problems, you may need to consider taking a more conservative stance with your own credit policies.

Remember there definitely are exceptions to every business rule, including those governing your business credit decisions. Also remember that business credit relationships involve business risk. Making the wrong credit decision could leave your company holding the bag – and that’s not fair to you or your employees.

Photo Credit: faizhauza, Twenty20