The three C's of effective credit risk management

Extending credit to new customers in order to potentially grow your business can be a risky practice that often suffers the adverse effect. Before extending credit to a customer you should ensure that you know the customer and aware of their spending habits.

Although credit sales can lead to potential business growth it doesn't necessarily translate directly to an increase in net profit.

If your business is looking to offer credit to new customers it's important to consider the three Cs of credit risk management.

Conduct credit checks

Credit checks are a vital first step to the credit management process; especially in the instance you are establishing a long term relationship with a new customer.

Credit checks allow you to assess your new customers ability to pay and can also protect you from potential fraud by confirming the business' existence or identity. Of particular note to examine on a potential customer's trading record is their connection with any companies that have failed and previous directorships they have been involved in, which will establish if they have been on the board of any failed companies.

If you want to organise a credit check, companies like Dun and Bradstreet can help.

Consider your terms

Your payment terms will define how consistently cash flows in to your business and will also have an impact on how well you are positioned to meet your expenses and obligations. You should determine your credit terms based on the level of your available cash reserves and the value of your fixed expenses.

For example, there is no real logic in offering 60 day payment terms to customers if you only have 30 days to make payments to your suppliers. If you feel lowering your payment terms will negatively impact your customer base, try implementing a payment plan to guarantee some money inflowing to your business.

Collect overdue accounts

It's entirely possible to accumulate bad debts even after researching your customers thoroughly and reviewing your payment terms. In order to confirm these payments it's vital that you start your collection process as payments become overdue.

More importantly, it's worth having a contingency plan in place that will prevent losses by reminding customers of the payments they owe. This can be done by simply sending a reminder note to customers as the payments become due and escalating the process as necessary. A debt collection is another good option to use in the instance you are struggling for time and don't feel you have the necessary skills to chase up late payments.

Creating a healthy cash flow in your business can be especially difficult when you extend credit terms to new customers. By following the three C's of effective credit risk management you can improve your business efficiency and protect yourself from bad debt in the process.

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