Efficient Trade Credit Management Process

What you’ll learn


  • What is a credit management process?
  • How to assess the creditworthiness of a customer?
  • What are the challenges involved in trade credit assessment?

Credit Management Process

‘Trade Credit Management’ is a process in which a supplier analyzes whether a buyer is creditworthy or not. In simpler words, this means the supplier credit teams analyze whether the buyer will be able to repay if they purchase goods from them. This allows the buyers to purchase goods without having to make immediate cash payments.

Role of the Credit Department in Credit Risk Assessment

Just as bankers evaluate the credit risk associated with their loan customers, credit managers have to assess the credit risk associated with extending credit to their customers.

The credit team must play the role of a watchdog by being the Credit Controller: typically, Sales teams receive incentives to increase sales at the cost of overlooking credit risk; Credit Managers need to strike the right balance between sales and credit risk. An inappropriately high credit limit can put accounts receivable at risk, while an inappropriately low credit limit could result in a loss of opportunity to sell. Credit Managers use credit limit as the lever to control credit risk and strike an optimal balance.

How to Run a Credit Check on a Business?

Based on the 5Cs of credit, the credit teams analyze the creditworthiness of a customer. They usually follow the following steps to assess their customer portfolio risk:

1.Review the Customer’s Credit Application

For a new customer, review the credit application thoroughly to get detailed business information, credit references, billing & shipping information, and much more. The credit application acts as a consolidated record for the new customers. For existing customers, this step is usually not performed.

2.Review Customer’s Financial Health

For a new customer, download reports from credit agencies(D&B, Experian, CreditSafe) to analyze the customer portfolio’s credit ratings and payment scores. Additionally, credit management teams should also review the public financial statements such as cash flow statements, profit and loss statements, balance sheets to assess the customer’s financial health. For an existing customer, credit teams review the payment behavior apart from the 3rd party credit ratings, financials.

3.Ask for Credit References

Especially for new customers, it is necessary to request credit references such as bank and trade references. These references verify the buyer’s financial position in the market and whether they are creditworthy or not.

4.Calculate the Credit Score and Credit Limit

Credit teams use sophisticated risk models to quantify the customer’s creditworthiness. These risk models are customized to the industry and the credit policy followed by the organization. Various parameters are used in these risk models, and they have different weightages across organizations. These parameters generally fall into the following buckets:
Financial Health – Income Statement, Balance Sheet, and Cash Flow Key financial ratios (some of them being industry-specific) are used in the model as financial health indicators.

  • Payment Behaviour – For existing customers, their payment history acts as a proxy for predicting future payment behavior. KPIs such as Average Days Late (ADL) is used to quantify payment behavior.
  • Operational Indicators – Age of business, length of relationship as a customer, number of employees, number of customers, etc.
  • Environmental Factors – Sometimes, it is essential to consider environmental factors such as the country of operation of the customer (factor in political and regulatory risk), the region of operation (if it is prone to natural calamities).
  • 3rd Party Credit Agency Rating – D&B Paydex score, Experian FICO score have relevant weightages in the credit scoring models.

Upon calculating the credit score, a credit limit corresponding to that score is assigned to the customer.

5. Get Credit Approvals

Once the credit limit is assigned, it has to be approved by various stakeholders. For instance, a credit analyst might have the authority to approve credit up to $10k, beyond which the credit manager, VP of credit, and other stakeholders get involved.

Credit Management Process

Key Challenges Encountered in Credit Management Process

The majority of credit operations involve a lot of manual intervention. As a result of this, the credit team dedicates a lot of time to clerical tasks instead of the core credit decisions. These are a few significant challenges encountered by the credit teams:

1.Manual Customer Onboarding Impacting Customer Experience

Credit applications are usually paper-based, and customers often miss out on adding important business information. As a result, the credit teams have to interact with the customers multiple times to capture correct and complete information. Additionally, slow credit reference verifications lead to a delayed customer onboarding process, impacting the customer experience.

2.Manual Credit Data Aggregation, Credit Scoring, and Approvals

Credit teams need to log into D&B, Experian’s portals and manually download every single credit report. Imagine doing this activity for 1000 customers! After downloading the reports, credit analysts have to manually review the credit ratings, financials and calculate the credit score. Credit approvals become slow and tedious because of multiple stakeholders involved.

3.Lack of Real-Time Visibility into Portfolio Risk

With periodic reviews, credit teams struggle to identify the at-risk customers. The credit risk of a portfolio can change at any time. With 1000s of customer portfolios, it is difficult to regularly review and track the frequent changes in their credit profile.

Best Practices for B2B Credit Risk Management

1.Faster Customer Onboarding with Online Credit Application

With a configurable Online Credit Application, your credit teams can onboard customers faster across the globe. Online Credit Application can be configured in multiple languages and based on your customer segments. With pre-filled credit applications from the sales team, your customers don’t need to spend a lot of time filling up the credit application.

2.Automated Credit Scoring and Approval Workflows

Credit teams can fast-track their credit decisions with automated credit scoring and collaborative e-workflows. The credit scoring model can be configured across business units or customer segments.

3.Real-Time Credit Risk Monitoring

With significant macroeconomic fluctuations, it is not ideal for reviewing the customer once or twice a year. Credit teams should monitor their customer portfolios regularly to get real-time visibility into changes in their credit profile, payments profile, and filings.

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HighRadius Credit Software automates the credit management process, enabling credit managers to make highly-accurate credit decisions 2X faster and enable faster customer onboarding with 4 primary components: configurable online credit application, customizable credit scoring engines, credit agency data aggregation engine, and collaborative credit management workflow. Along with that, there are a lot of key features that should definitely be explored some of which are online credit application, credit information aggregation, automated credit scoring & risk assessment, credit management workflows, approval workflows, and automated bank & trade reference checks. The result is faster customer onboarding, better internal collaboration, higher customer satisfaction, more targeted periodic reviews, and lower credit risk across the company’s customer portfolio.