How can you minimise risks when granting credit and avoid payment defaults? And how do you know which clients you can count on, even during a crisis? The credit policy forms the basis for this. It is a rulebook for credit management that describes in detail the roles, responsibilities and workflows around the granting of credit. Five tips for a functioning credit policy from Daniel Schneider, Senior Business Consultant at Dun & Bradstreet.
1. What goals do you want to achieve?
You can only act purposefully if you know your goals. This is why you should formulate clear goals regarding how to prevent bad debts, define clear processes and sustainably increase the company value or optimise risk costs. Outline the specific tools you would like to use to achieve this.
You should also note that a credit policy is not a rigid set of rules but is subject to all sorts of influencing factors. This is why you should establish the intervals at which the credit policy is to be reviewed and, if necessary, updated or supplemented.
2. Who takes on which responsibility?
The goals can only be achieved if all employees strictly adhere to their roles and responsibilities. However, this assumes that everyone knows their role and that these roles are also outlined in the credit policy. A wide range of functions and departments are involved. In addition to the credit management team, this includes sales, logistics, customer service, accounting and the executive board.
The responsibilities are also clearly defined in the roles and tasks. There must be no room for manoeuvre here. Ultimately, the people who are part of the risk management system and their roles and importance differ from industry to industry and from company to company. In the end, the credit policy should be approved by the entire C-Level so that it is accepted throughout the entire company.
3. Which processes take effect and when?
Besides the roles, the processes are crucial. Your main task as a credit manager is to keep an eye on the creditworthiness of suppliers and clients and to identify sources of risk, causes of loss and potential disruptions in good time so that those responsible can put countermeasures in place at an early stage if necessary. This requires real-time data as well as corresponding structures and processes that ensure the agility and flexibility required in your business.
Describe how the risk management processes are integrated into the business processes as continuous processes. For this purpose, the individual tasks must be defined and embedded in defined workflows.
4. Which terms stand for what?
Communication only succeeds when one partner understands the other. This is not straightforward in credit management, an area of activity with an abundance of technical terms and anglicisms. Therefore, you should compile a glossary defining the most important terms.
5. What happens in the event of a risk event?
Each business partner is given a risk class. This raises the question of who is authorised to make decisions on which risk classification. One answer is the rating matrix. This determines who can draw a limit in the event of a risk occurring, the extent of this limit and which priorities apply in the event of risk. This allows the finance department to override agreed payment terms to minimise the danger for clients with risky ratings.
The scope of a credit policy
The scope of a credit policy depends on the type and size of the company.
“The more diverse the influencing factors, the more complex the processes. This inevitably means that the policy will also be more comprehensive,” explains Schneider. In the case of banks, these kinds of policies can run to 150 pages or more. As a general rule, the length varies from 50 pages to a few pages for smaller companies.