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:

 What credit management is

 The steps in the credit management process
 The factors that influence the credit review and risk analysis process
 What makes for a high-performing credit manager
 Three tips for improving the credit management process

What is business credit management?

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.

The 5 steps in the credit management process

1. You establish your credit policy

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:

 The criteria your credit team should follow when evaluating a customer’s
creditworthiness
 The payment terms you’ll enforce (e.g. net 30, 60, or 90 days) and where
exceptions may apply
  Rules for early payment discounts
 How you’ll set credit limits for customers, and how they may differ for new vs.
existing customers
 The information you require from customers to make a decision about granting
them credit
 How you’ll follow up on overdue payments and your procedures for dealing with
delinquent accounts

2. Customers fill out a credit application

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:

 Their contact information (including their point of contact for accounts payable)
 How much credit they’re requesting
 A reference from their bank, and potentially a reference from a supplier they’ve
worked with before (a trade reference)
 Financial information like their company’s annual sales volume

3. You conduct research

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.

4. You approve or deny the request for credit

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.

5. You continuously monitor customers’ credit

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.

The credit review and risk analysis process

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.

The credit review process for a new customer

When evaluating new customers, positive indicators of creditworthiness include:

 A favorable credit score and credit history according to agencies like Dun &
Bradstreet
 The company has never filed for bankruptcy in the past
 The company does not have multiple liens (where the company has put up
collateral to satisfy a debt) open
 The company has not exhibited any fraudulent activity
 The company has been in business for many years
 The company is operating in a stable or growing industry

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.”

The credit review process for an existing customer

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.

 The majority of their past invoices have been paid on or before the due date
 The majority of their past invoices have been paid in full, and if they have short
paid in the past it was for a valid reason
  The customer has little or no outstanding debt on your books
 The customer’s business has experienced no drastic deterioration in financial
health

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.

 The customer has consistently paid their invoices late over the last several
months, suggesting their business is experiencing cash flow issues
 The customer has disregarded your terms of sale on several occasions
 The customer has a significant overdue balance of more than 90 days past due
 The customer has a history of ignoring your collections communications for
several weeks or longer

That being said, professional 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.

The responsibilities and traits of effective credit managers

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:

 Conducting credit checks on new and potential customers

 Implementing collection policies and regulations
 Helping accounts receivable (AR) colleagues (especially collections staff)
manage days sales outstanding (DSO).

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.