Credit risk, who decide

You 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.

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.

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. It loses in proximity with the customer and the business but gains enormously in efficiency and often in relevance of the information collected.

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  Manage credit risk in My DSO Manager

  My DSO Manager is a web-based software that allows you to easily and efficiently manage your AR: debt collection, dispute management, risk management, etc.
  
  Easy to implement and ergonomic, this solution is used by small businesses as well as large international groups..
  
  Use credit analysis tools and the credit limit validation workflow based on predetermined validation levels.
  
  The risk report and alerts provide a synthetic view of outstandings against credit limits and highlight overdue accounts receivable.
  
  The software also automatically retrieves information about your customers from multiple financial information providers. See the online demo.

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.

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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