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Credit risk, who decide


risque créditYou have obtained behavioral and financial information about your client. You put them in perspective with the commercial stakes and the contractual conditions: payment term and mean of payment, liabilities, guarantees, ....

Based on this analysis, you may have influenced trading negotiations to further secure this revenue opportunity. At the end of the day, there is a risk that you have assessed.

The remaining question is "who decides?"
Who decides to take this risk and take the order, or on the contrary to refuse it to be sure not to expose his company to a bad debt?

A tough choice between conflicting interests

The decision to sell with a payment term, therefore to grant a credit to his client is one of the major challenge of Credit Management. The subject is sensitive because any unpaid invoice has for origin this choice made during the commercial negotiation. It is a question of responsibility when it comes to the commitment of one's business with one's client and the commercial issues that flow from it.

Of course, the credit risk can (must) be assessed with the techniques of financial analysis, evaluation of the payment behavior of the potential customer (does this company respect its commitments?), assessment of commercial risks (risk political, currency risk, transfers and limits of responsibilities ... etc.).

It can then be reduced by resorting to contractual clauses protecting the seller (retention of property, forfeiture of the term clause, suspension clause ... etc), with more advantageous payment terms (always request down payments with the order !) or to bank guarantees or credit insurance.

However, the commercial context and the reality of the commercial relationship do not always make possible to cover the identified risks. There comes a time when you have to make a choice: sell with taking a risk or refuse the risk and do not sell.
At this stage, sales people and financial people do not always have the same opinion on the strategy to adopt!
It is in this situation that the credit manager takes all his importance by merging commercial and financial interests to bring out only the one of the company.

A key principle: keep your freedom of decision

Far is the time when credit managers spent half of their time meeting customers to obtain financial information and negotiate appropriate terms of payment.

The need to be much more productive and the arrival of new and more connected tools have changed these practices.
The credit manager, while continuing to visit some strategic clients, relies on specialized partners such as financial information providers, credit insurers, factoring companies, debt collectors, etc. to achieve its mission.
It loses in proximity with the customer and the business but gains enormously in efficiency and often in relevance of the information collected.
The risk is that this will lead to a form of delegation of the credit decision to one of its partners, which must be avoided.
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Some pitfalls to avoid

For example, the use of credit insurance or a financial information provider may in some cases have an unforeseen effect on the behavior of companies regarding customer risk management.

Indeed, credit insurance provides several services, two of which are of particular interest to us here:
  • The granting of guarantees (for example, a guarantee of 15,000 euros on customer X),
  • The assessment of the solvency of the buyer through the amount of guarantee granted: if the insurer gives a guarantee on a buyer, it is precisely because his analysis is good ... or bad if it is not the case.
This principle sometimes creates a dependency on the insurer. We do not dare to take a decision contrary of the credit insurance. It develops a delegated risk management: the credit decisions of the insured company are in fact those of the insurer, which is not a good.

Indeed, credit insurers have, as any business, their own constraints that are not those of the insured company. For example, the accumulation of guarantees granted to several insureds on a single company limits their ability to grant additional guarantees. The first applicant is usually better served than the tenth!

A strategic customer for an SME is just one of millions of other companies in the portfolio of an insurer or financial information provider. The sheer number of companies to cover contributes to a certain conservatism of the underwriters who will set the acceptable risk slider at a lower level than their clients would.
These service companies can be important partners, but they are only partners, not the decision-makers of their client's business decisions (they do not ask for so much), who must keep their autonomy being aware of these realities.
This principle is also true for providers of mass financial information (to be distinguished from tailor-made surveys), which have millions of companies in their database. How can I be sure that the information provided on your strategic client is first quality?

Credit risk at the heart of Credit Management

If the above schemes are not satisfactory, here are some ways to go in the right direction.

First key principle, is that the validation of credit risk is the sole responsibility of the company: manage by Accounts Receivable team, financial management or credit management if it exists, and its hierarchical line to the top of the company.

Second principle, the service in question is under the financial management or the general management. It works closely with the business but it is not part of the sales department. See credit management organization tutorial.

Third principle, it works with external partners (financial intelligence companies, credit insurers, banks ... etc.) to assess the risk and reduce it but he does not delegate his "credit decision" to a third party.

Fourth principle, risk taking is concerted and validated by the appropriate level.

Conclusion

The decision to grant credit to a customer is therefore a decision exclusively internal to the company. It has to define a strategy of credit management and operating rules in order to not put at risk sustainability of the company while allowing it to develop its turnover and provide a scheme of approval of cases that do not fit into its policy.

The higher the credit risk, the more the validation of this risk-taking must be concerted between the stakeholders (commerce and finance) and the general management.

The use of validation levels allows both the sharing of information (and the credit analysis performed) and that the decision is made at the right hierarchical level with respect to the stakes.






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Last comments

In the credit investigation process it was the Credit Investigator who gather credit or financial information of the customer in the field and prepare credit report for final approval of the Credit Manager. It is a consultative process of decision making.
From :Carlito Carlos Edwin A. Gierran /
Very good, but how much? how to assign a maximum amount of exposure to each client's risk? what quantitative and qualitative variables should be considered to leverage sales, satisfy the customer and at the same time minimize the risk of loss?
From :Jose Ary /

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