💼 Is Your Credit Risk Managed?

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So much of what I talk about surrounds the cash process, which is crucial to your business thriving and growing the way you have planned. How well do you manage the process of establishing credit for new customers? Do you analyze existing ones?

Managing customer credit effectively is essential for maintaining a healthy cash flow and minimizing financial risk. Whether you’re evaluating new customers or monitoring existing ones, a structured credit analysis process is key to making informed decisions. This week’s discussion will guide you through developing a robust credit evaluation strategy, using credit reports, and leveraging data to protect your business while fostering growth.

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Step 1: Building a Credit Analysis Process
When onboarding new customers, a thorough credit analysis ensures you understand their financial stability and payment behavior. Create a standard evaluation process that includes credit applications requiring key information such as business structure, banking references, and trade references. Utilize tools like Experian or Dun & Bradstreet to gain insights into payment history, financial health, and risk factors, and establish an internal scoring system to rank potential customers based on creditworthiness. For existing customers, proactive reviews prevent surprises and keep you ahead. Review payment trends to spot delays and adjust terms as needed, and revisit customer credit profiles periodically to track changes in financial standing.

Step 2: Leveraging Credit Reports to Your Advantage
Credit reports from agencies like Experian and Dun & Bradstreet provide valuable insights. Look for credit scores to assess reliability, payment trends to identify late payment patterns, and public records such as bankruptcies or liens that could affect a customer’s ability to pay. Use these insights to categorize customers into low, medium, or high risk, tailoring payment terms and credit limits accordingly. Compare customer data to industry benchmarks to set realistic expectations.

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Step 3: Evaluating Credit Limits
Credit limits are a powerful tool to protect your business while supporting customer growth. To manage limits effectively, set clear criteria based on credit scores, financial statements, and payment history. Regularly monitor utilization, as high usage may indicate financial strain. Adjust limits strategically, increasing them for strong performers to foster goodwill and decreasing them for those showing signs of risk. Establish a review cadence to evaluate credit limits and ensure they remain aligned with current risk levels.

Step 4: Streamlining Credit Forms and Escalation Processes
Forms are the foundation of your credit analysis process. Well-designed forms ensure you collect all necessary information upfront. For new customers, include fields for legal business name, EIN, trade references, and authorization for credit checks. Develop escalation processes for situations such as exceeding credit limits, late payments, or requests for credit limit increases. These forms should capture incident details, actions taken, and required approvals for consistent handling. Create simple templates for ongoing reviews to summarize updated credit scores, recent payment history, and recommendations for changes to terms or limits.

A structured credit analysis process can transform your receivables management, reducing risk and enhancing cash flow predictability. By leveraging credit reports, setting thoughtful credit limits, and using well-designed forms, you’ll create a proactive approach that keeps your business financially secure while supporting healthy customer relationships. Take control of your credit management today and position your business for long-term success.

BG