5 Basic Rules for Efficiently Managing Credit Risks

Managing credit risks properly is necessary for any company that wants to remain financially effective. Here are some basic rules that you, as an entrepreneur, can best follow to develop a good strategy for your credit management.

There is actually one basic rule that always applies and that we will not include in the overview below: take preventive action, do not wait until it is too late. To manage credit risks efficiently, you will need to learn how to anticipate these risks. 

Fortunately, there are modern systems that can help you with this. With these systems and with a little bit of discipline you can quickly take a few big steps forward.

Here are five basic rules that help you better manage credit risks.

1. Don’t just focus on new customers

It’s in our human nature that we soon assume that long-term relationships are stable and solid and that there is a fundamental trust, so that we no longer have an eye for the risks of existing relationships. In reality things are different. About 80 percent of the depreciation comes from business partners with whom the bond is at least a year old.

Do not consider the assessment of credit risks as a one-off process. Evaluate your customers and suppliers regularly. Watch trends in the business world and keep a close eye on the profiles where threatening problems arise.

2. Rely on technological tools

You may consider a manual check as thorough. However, today there are so many sources of information available that it is very likely that you will miss or misinterpret critical data. By collecting data from multiple information sources and combining them with each other, you get a total and complete picture of your business relationship. It will help you make better informed decisions.

Work with a reliable information provider who can offer you complete and up-to-date information and associated analysis tools for optimal risk management. In the long term you will save money and time because you can manage credit risks much more effectively and quickly with few people.

3. Trust your colleagues

Some of your best allies are in sales, support or customer service. For example, a salesperson can deduce from a conversation that a customer is running down. Sellers and account managers sit at the customer’s table and can see with their own eyes how things are going in a company.

Keep your eyes and ears open. There is a greater chance that you will receive essential information that you need to estimate a credit risk in a timely and correct manner.

4. Take fraud seriously

Companies are eager to attract new customers and develop new relationships. In that process, however, they are often just a little too enthusiastic. They then become blind to the signals that a promising order might just look a bit too good.

Take preventive measures for all your business relationships. If you see flashing lights, notice a lack of clarity in the history or if you think it is ‘too good to be true’, do not run too fast. Make sure you have all the answers to correctly evaluate the credit risk.

5. Manage risks, not exclude them

It is your job to manage risks, not to completely exclude them. If you want to exclude all credit risks, it is better to close the doors. 

Because the more you do to eliminate risks for your company, the more expensive and time-consuming the process will become. At some point, the costs that you incur to avoid risks will exceed their benefits.

Fine-tune the right tools, technologies and processes to manage risks in the most cost-efficient way. Once you have achieved this, you can be confident that you have found the right balance between risk and reward.

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