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Tips, techniques, and practices to get paid what you're owed.
Effective credit management helps companies take on new business while avoiding the risk of bad debt.
Finance leaders know the success of their business depends on how efficiently they can get cash in the door. Credit managers play a central role in this mission, as they’re tasked with striking a balance between helping sales move forward quickly and ensuring the business doesn’t take on the risk of bad debt.
This is especially true for business-to-business (B2B) focused companies, the majority of which provide their products, goods, or services ahead of customers paying their invoices (i.e., on credit).
In this article, we’ll cover:
Credit management is the process of deciding which customers to extend credit to and evaluating those customers’ creditworthiness over time. It involves setting credit limits for customers, monitoring customer payments and collections, and assessing the risks associated with extending credit to customers.
The risk of customers defaulting on payment is a high concern in B2B, with nearly half of all B2B invoices in the US getting paid late according to a 2022 Atradius survey. Effective credit management processes help businesses mitigate this early on.
Your credit decisioning process should follow a documented credit policy that establishes the company’s rules for offering credit terms.
Your credit policy should outline information such as:
Before you agree to do business with a new customer on credit, you’ll need to collect some information from them in order to determine whether you can count on them to pay their invoices. You’ll do this through the credit application process.
During this stage, customers will supply information such as:
Your credit management staff will then do their due diligence with the information potential customers have supplied. At this stage, your team will contact the references the applicant provided to get a sense of their financial history. They’ll also pull additional information from credit bureaus to further assess prospective customers’ financial health.
Processing a customer's credit application can take several days, after which you’ll decide whether to approve or deny the customer’s request for credit. For large credit requests, you might require approval from multiple stakeholders.
If you decide a customer isn’t a good fit for receiving payment terms, you may still decide to take their business but on the condition they pay upfront or upon delivery.
After granting a customer credit, you’ll want to continuously monitor them to ensure they stay on track with their payments. Payment history provides a good predictor of a customer’s future payment behavior.
Regular customer credit checks are also a good way to catch any deterioration in customers’ creditworthiness.
Tips, techniques, and practices to get paid what you're owed.
When evaluating whether to extend credit to a customer, businesses will look at several factors. These will differ based on whether you’re evaluating a new customer or potentially looking to increase an existing customer’s credit limit.
When evaluating new customers, positive indicators of creditworthiness include:
Every company’s risk tolerance will vary, based on their size, cash flow, and margins. And while credit managers will often use a credit scoring model to make their decisions, there is undeniably an aspect of “trusting your gut.”
With an existing customer, you have the benefit of access to data about their payment history when making decisions about their credit.
If an existing customer meets all the conditions below, then you can confidently approve their request for additional credit.
Conversely, if an existing customer meets any of the conditions below, then you may want to be prudent and avoid raising their allowed credit limits.
That being said, credit management revolves highly around human judgment. There will be instances where you’ll want to cut a customer some slack, especially if it’s a relationship you want to preserve.
If a customer has recently started paying their invoices late but has an otherwise timely payment history, then you can likely be more lenient with them. For routinely late-paying customers, however, you’ll want to consider working with them on a specific payment plan or changing their payment terms.
Given the difficulties and sensitivities around collecting payment from some customers, credit managers must be able to juggle a range of complex responsibilities. These include:
Great credit managers are savvy communicators, agile problem-solvers, and generally risk-averse. They also know that offering credit is never a one-and-done process. Customers change, industries go through boom and bust periods, and credit review and risk analyses need to evolve with these shifting situations.
Here are three ways you can improve your credit management process to reduce late payments and bad debts, improve cash flow, and build stronger relationships with your customers.
To incentivize prompt payment, remove as many barriers in your customers’ payment experience as possible.
When you dictate which payment methods customers can pay with—like paper checks—you may be unwittingly extending your DSO. Paying with a check requires extra work from your customers’ accounts payable (AP) team, like preparing it to be posted in the mail.
A survey we ran of technology leaders within finance departments found that 87% of respondents believe their buyers are ready to move away from checks in favor of digital payments. Giving customers more digital payment options, especially through a convenient online payment portal, can encourage your customers to settle their invoices before they're even due.
It’s very difficult to make credit decisions when you lack visibility into the current status of your customers’ payments.
Manual cash application processes are a big contributor to this, as delays in applying payments to invoices can prevent your team from replenishing customers’ credit—and in turn, prevent customers from making any more purchases.
Cash application automation can significantly speed up the process of matching payments to receivables, especially in complex cases like short payments and payments covering multiple invoices. As a result, you’re able to arm your credit management team with a real-time view of customers’ payment status.
Customers don’t just default on payments due to unforeseen changes in their business. Sometimes, as the Atradius study we referenced earlier indicates, customers intentionally pay late. The research found that nearly 30% of companies polled said customers defaulting on payment was largely due to disputes.
Invoice disputes tend to escalate because of miscommunication, given that traditional AR workflows make it difficult to find information and share it with customers’ AP teams quickly.
In fact, our research with Wakefield uncovered a direct link between miscommunication in the payment phase of a deal and disputes. Eighty-five percent of the 1,000 C-suite executives we surveyed agreed that poor communication between their AR team and their customers led to the company being paid less than they were owed.
To prevent a dispute from souring a customer relationship and holding up payment as a result, address invoice discrepancies as early as possible. You can do this with a Collaborative AR solution that allows your team to communicate with customers over the cloud, directly on the invoice in question.
You can learn more about the causes of invoice disputes here.
With the economic headwinds we’re currently seeing, aged receivables are getting even harder to predict. This makes credit managers’ jobs more challenging—and all the more pertinent.
But, focusing on automating manual accounts receivable tasks, staying on top of credit reviews and policies, and nurturing customer relationships can help your business protect cash flow during an otherwise uncertain time.
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