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9 Questions on Effective Credit Risk Management Answered

22 December, 2021
4 min read
Rachelle Fisher, AVP, Digital Transformation
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What you'll learn

  • Explore key challenges associated with traditional credit risk management processes
  • Learn best practices that can help you scale your business and lower bad debt with real-time credit risk monitoring tools
CONTENT
Introduction
9 Key Questions on Effective Credit Control Answered
The way forward
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Introduction

A credit manager and his team analyzes customers’ financial health and decides the optimal credit limits. Manually doing this takes up a lot of time and effort. Your team may need to spend hours doing mundane activities involved in onboarding customers, collecting financial data, calculating credit scores, and conducting periodic reviews. The heavy reliance on manual approaches to complete the processes leave your AR team with little time to focus on strategic high-value tasks.

More than 90% of firms have a future vision for the risk-proof credit management strategy. Selling goods and services on credit helps you grow your customer base and strengthen client relationships. But traditional credit management has many grey areas which eat up a lot of your teams’ time and effort.

This blog discusses the key challenges faced by the credit teams while using traditional systems. We also look at modern approaches of credit management to reduce bad debts and delinquent accounts.

9 Key Questions on Effective Credit Control Answered

01. What are the key components of credit risk management?

Credit teams are the first line of defense to combat financial risks to your business. A robust credit strategy forecasts potential business risks and helps identify prospects or clients who are likely to default.

Credit risk management is a very critical aspect for mid-sized companies to limit adverse impacts on their bottom-line. Your credit policy must focus on onboarding customers, use the best credit scoring models, standardize workflows, and periodically assess customers’ financial health.

Let’s look at the key components of a strong credit risk management strategy.

  • Streamlined customer onboarding process
  • Efficient credit data aggregation (credit agency information, public financial statements, bank & trade references, financial stress prediction)
  • Best-in-class credit scoring model
  • Standardized approval workflows (between internal departments and customers)
  • Periodic credit reviews

Key components of effective credit risk management

02. How to onboard customers faster?

The onboarding process is a key touchpoint for customers with your organization, where first impressions are often formed. The whole process should be smooth and fast for better customer experiences.

But in most mid-sized businesses, the customer onboarding process is manual and cumbersome. The whole process is also slow and prone to errors. Complex workflows where data or approvals are needed from multiple teams further stretch the time required to onboard customers.

Online credit application forms can help replace the paper-intensive process with an electronic experience and quickly onboard customers. With an online credit application form, customers can fill in their financial information without missing out on any important details. e-Workflows enable automatic approvals (provided the required criteria are met) to support faster onboarding. Automating the credit application and approval workflow can also improve the customer experience.

03. What are the essential fields in a credit application form?

The credit application form plays an important role in the onboarding process. Most credit applications are paper-based and require customers to fill in many fields. This makes the process tedious and customers often submit incomplete or inaccurate forms.

Ensure that your customer credit application is not too lengthy but still captures all the relevant information. Here are some important fields to include in your online credit application form:

  • Type of Business
  • Credit extension required
  • Applicant’s certification
  • Applicant’s authorization
  • Terms & conditions

To know more about the essential fields for accurate credit assessment, check out this blog6 Must-Have Fields In Any Credit Application Form For Business.

04. What are the top information sources for credit risk assessment?

Apart from the information provided in the credit application form, you should also research your customers’ financial background using data provided by third-party credit agencies.

Credit rating agencies and bureaus help you predict your customers’ current and future financial health. Here’s a list of authenticated credit information sources for risk assessment:

  • Equifax
  • FICO
  • D&B
  • Experian

how to build a credit scoring model

Sources: Link

Third-party credit agencies provide the latest, authentic, and accurate information about companies. But, you have to pay a high subscription fee to aggregate the credit information from different sources. AR automation solutions like ours provide out-of-box integration with leading credit agencies, thus helping you avoid the high subscription fees.

05. How to build the perfect credit scoring model?

Many credit teams use the same scoring model for all their accounts. This one-size-fits-all model is an inefficient way to calculate credit scores.

Your customer base is varied in many ways including by industry, type, geography, and compliance  measures required. You need a flexible scoring model to get accurate scores for each of your customers. Your model must use real-time data from credible sources to ensure that you keep track of all high-risk accounts.

The credit review and customer onboarding decisions are often heavily influenced by the sales executives based on their opinion of the client. This leads to high-risk customers often being allowed undue limits.

Credit decisions made without data-driven validation of the creditworthiness of customers is likely to lead to higher bad debts.

Use the following factors to calculate creditworthiness or credit score:

Effective credit control techniques

Check out “Top 15 Must-Have Credit Scoring Parameters” to learn more about credit scoring models.

06. What are the major factors to consider for credit scoring?

If you want to effectively manage credit, you must be aware of these parameters for effective risk management and decisions:

  • Delinquency Score: This score provides insight into the likelihood of a business paying late or having future payment problems
  • Paydex Score: This score is assigned by Dun & Bradstreet, based on the past payment performance of a company, and categorizes companies into different risk groups, on a scale of 1 to 100.
  • Average Days Beyond Term: This is an important credit term that describes the average number of days it takes a business to pay its bills past the due date.
  • Predictive Scoring: This score takes into account 12 months of historical trade data to predict severe delinquency looking forward into 6 months.
  • Failure Score: Previously known as the Financial Stress Score, this is a dynamic risk indicator predicting the probability of a business going bankrupt in the next 12 months.
  • Years in Business: A company’s ability to pay on time can be partly determined by its size and number of years in business. Businesses that have been around for longer are considered more trustworthy.

These parameters help you to make a better credit policy and give a 360-degree view of associated risks and opportunities. Check out “The Theory of Credit Scoring Every Mid-sized Business Should Know! .

07. Why is periodic credit review important to stay on top of high-risk customer accounts?

Constant monitoring of customers’ financial health is crucial to stay on top of high-risk customer accounts.  This can be done with periodic credit risk reviews. Periodic reviews refer to the updation of credit data and scores in specific time intervals for better credit risk accuracy. The parameters tracked include payment behavior, type of deductions, order size, and seasonality, among others.

Any changes in these factors influence a customer’s credit score and credit limit. Thus, periodic reviews help you constantly keep a tab on your customers’ financial health, update credit terms, and monitor chances of delinquency.

08. How does standardized credit management workflows help fast-track approvals?

Many mid-sized businesses lack proper workflow for credit approvals and correspondence delivery. The absence of standardized workflows result in miscommunications, leading to erroneous credit decisions. Incomplete data on the credit application form and the time taken for a credit to get approved by the senior management can result in delays in the overall process.

You must streamline the credit approval process using electronic forms and automation systems. Check out our credit risk application to see how we help make your team more efficient

09. How to improve correspondence with clients?

You need to inform your customers about credit acceptance, credit denials, and any additional data needed. Many mid-sized businesses rely on paper-based correspondence techniques such as sending letters by post to convey such information. This is time consuming,  inefficient, and expensive.

Electronic channels (emails and notifications and alerts on the app) help make the correspondence process smooth. Ready-to-use templates can save your team the time spent in drafting the letters. Correspondence delivery via emails helps save on the costs.

The way forward

Credit teams are the watchdogs of your organization’s bottom line; their work never pauses. Creating a standardized credit risk management system is a crucial step to enhance the cash cycle. Your credit team has to constantly assess the risk associated with your existing customers to eliminate any possibility of delinquency.

But over the decades, there have been significant advancements in this process using automation software. Best-in-class AR solutions help mid-sized companies onboard customers faster, standardize credit scoring, automate credit workflows, and improve correspondence management.

The right software tools and strategies make your credit risk management process efficient and effective.

You may also like to read – 5 Benefits of Automation in Credit Risk Management.

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