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Credit Risk Management Strategies for Business Owners

Ann Marie Smith

5/1/2024

Whenever you extend credit to a customer, you take a risk. If you provide goods or services on credit and the customer does not pay or does not pay on time, it can hurt your bottom line. Understanding and managing your credit is key to a strong cash flow.

Credit Risk Management Strategies

Mitigating credit risk requires a comprehensive credit and risk management strategy to identify, evaluate, and control your level of exposure. Key strategies include:

Creating Clear Credit Policies

Businesses need to set effective credit and risk management policies to mitigate risk and maintain strong cash flow. Typical credit risk management policies include:

  • Defined credit terms: Detail the payment terms, grace periods, and late payment penalties. This provides customers with a clear understanding of their obligations and helps your business control its cash flow.
  • Customer financial assessment: Implement a thorough process for evaluating the creditworthiness of potential customers. This may involve reviewing financial statements, business credit reports, or other relevant information to assess the customer's ability to meet their financial obligations.
  • Accounts receivable monitoring: Regularly monitor the status of outstanding accounts receivable and follow up on overdue payments. Watch key metrics like Days Sales Outstanding (DSO) and aging reports to look for signs of potential problems.
  • Portfolio risk management: Conduct periodic assessments of your overall credit portfolio to identify any concentrations of risk or emerging trends that may require adjustments to your credit policies.

Proactively Identifying Risk

A customer financial assessment is key to proactively identifying risk. One of your easiest—and most valuable—resources is a business credit report. A business credit report provides valuable insight into the financial health of your customer at a glance to help you make better credit risk management decisions.

Reviewing Business Credit Reports

With a business credit report, you get information about your customer, including an overall risk score. You can evaluate this risk score in relation to your credit policies. You can also dig deeper into a company’s financial health and examine details such as:

  • Payment history
  • Account details for various accounts
  • Outstanding debt
  • Days beyond payment terms
  • Public records, including liens, judgments, and bankruptcies
  • Company information
  • Credit utilization
  • Verified business information

Verifying Business Identity

According to the Association of Certified Fraud Examiners (ACFE), every year businesses lose billions of dollars to fraud. On average, it is estimated that fraud adds up to a loss of five percent of annual revenues for businesses.

Do you really know with whom you are doing business?

A business credit report and background check can verify your new account to ensure you are working with a legitimate customer. If the information they provide on a credit application does not match up to their official business records, it should give you pause.

Conducting Credit and Risk Management Portfolio Reviews

While each customer should trigger a credit and risk management review, you also need to take into account your total portfolio risk. By scoring your present accounts receivable, you can identify clients that may be trending downward or paying slowly. This may be a reason to dig deeper into existing customers to determine if potential problems are looming or whether you need to adjust your credit and collection policies.

You can also pull business credit reports on demand to check whether there have been any changes to your customer’s financial health since you first extended credit. With account monitoring, you can quickly see changes that impact your cash flow.

Business Credit Report Suppliers

Three companies supply business credit reports, Experian, Dun & Bradstreet, and Equifax. Each provides slightly different information.

With Experian and Equifax, for example, you also get a risk dashboard that forecasts repayment risk, financial stability, and recommendations for credit limits. Dun & Bradstreet’s Paydex indicates the risk of slow payments on invoices and the likelihood that a company pays on time.

By proactively reviewing business credit reports for new customers, you can identify potential risks. Depending on the information you see, you may choose to:

  • Grant or deny credit
  • Require a deposit or personal guarantee
  • Adjust credit limits
  • Modify credit terms to align with the credit risk

With a clear understanding of your customer’s financial health, you can make better decisions about extending credit and under what terms and conditions. When you know who your customers are and their track record over time, you can get peace of mind and make more confident decisions without putting your business at any more risk than is necessary.

Command Credit offers innovative information solutions for your business, including comprehensive business credit reports from all three major suppliers, portfolio risk scoring and analysis, account monitoring, business verification, and more.

Pull on-demand business credit reports from Experian, Dun & Bradstreet, or Equifax to evaluate credit risk before extending credit to customers. Get business credit reports on demand to mitigate your risk.