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Protecting your business is essential, applying credit risk management processes can ensure that your business remains in control of its financial future. As the costs of living continue to rise and inflation increases it is a daunting time for many businesses.
Keeping control of cash flow and ensuring that your business remains in the black is key to surviving.
Many businesses should consider looking at credit risk management, to help navigate the uncertain times ahead. Let’s look into the process and see how it can help your business.
What is a credit risk management process?
A credit risk management process is the steps a business takes to assess the risks associated with providing credit to a company.
Many businesses work on a credit terms basis. That means that large sums of money are on loan until a product or service has been carried out. Only then is an invoice sent. It is then the responsibility of the business to follow up and chase any outstanding invoices and payments.
Having a credit risk management process can help businesses navigate the risks attached with working in this way. They will be able to make relevant decisions based around a potential risk and ensure that the client is able to pay for the products or services.
How to create a credit risk management process
How you create a credit risk management process can vary. Many banks rely on in-depth detailed credit risk management processes, due to the sheer volume of credit lines they offer. However, there are things that can be learnt from these strict processes.
We’ve pulled together some of the key details you can use to create and implement your own credit risk management process. Include these key aspects in your credit risk management process.
Onboarding
Onboarding your client is an essential step in credit risk management. Understanding your customer and identifying their customer profile will help you identify risks related to financial obligations.
Creditworthiness
Perform the relevant credit risk analysis to protect your business. Company credit checks are nothing to shy away from. If anything, a business that doesn’t want a credit check has just given you the red flags you need to look out for.
Assessing your client’s creditworthiness is key to ensuring that you manage credit risks.
Risk calculations
Every credit line you offer clients is a risk. Even if they have paid on time in the past, there is still an element of risk. Look at the various factors that can impact your client’s credit and calculate the relevant risks. Aline that with the risks you are willing to take as a business.
With the introduction of AI technology you may be able to utilise it to help you create a detailed risk analysis.
Monitoring
Once you have agreed on all relevant credit terms and processed the risks, you then need to monitor the results. Keep track of payments and processes and make sure that you send any late payment letters or reminders. Ensuring that clients pay their invoices on time is essential for your business’s cash flow.
Tips for applying a credit risk management process to your business
Understanding the benefits of credit risk management and applying the process to your business are two different things.
Once you have created a process outline of credit risk management you then need to begin implementing it. This will include providing employees with the relevant information and resources they need to complete the credit risk assessment.
Ensure each team member understands the importance of this process as well as how you anticipate it to be completed. Provide any additional support that is required and allow time to have the process established.
Consistency is essential for all processes. Starting something is easy, but keeping it consistent is what takes the time and effort. For the full benefit of a credit risk management process to be seen, you need to be consistent in your efforts.
Debt is sometimes unavoidable for businesses. As costs increase along with inflation, many businesses may find themselves in financial difficulty. Working with a debt collection agency may be the best solution to recovering unpaid invoices.
Here at My Debt Recovery, we understand the human behind the debt, as such we work with you to ensure that debts are collected with as little impact to each other as possible. Contact our team now for assistance.
