Basics of Business Credit

How to Screen and Monitor Business Credit Risk

Stay on Top of Changes to Your Customers’ Business Credit Risk

Extending trade credit to customers is a great way to earn their repeat business. It’s a win-win situation for both parties – the customer has a continued demand for your products and services, and your ongoing relationship means you can trust that they will likely continue to pay their invoices on time and in terms.

In addition, repeat orders also take less time to process than orders from new customers. With a new customer, the lender needs to assess creditworthiness and assign credit limits. But once the customer has been approved for a specific credit limit, a similar repeat order doesn’t need the same level of scrutiny.

However, that doesn’t mean credit assessment is a one-time affair. Proper risk management calls for periodically evaluating trade credit accounts to manage and maintain the company’s risk exposure.

What Is Credit Risk Monitoring?

Credit risk monitoring is the heart of account management. It’s what lets credit managers know when it’s time to perform a periodic credit assessment and account review. Through monitoring, for example, a credit manager can be notified when a customer’s business credit scores decrease or increase, if the company moved, if they’ve placed an order three times their typical amount, or if they’ve been named in a lawsuit. At that point, the credit manager can decide whether to take action.

Tools for Credit Risk Monitoring

One way to screen and monitor accounts is through alerts in your credit risk management software. Dun & Bradstreet has several Finance Solutions that can send users alerts (via email or in-system).

Businesses that don’t have access to alerts within their credit risk management software can monitor their accounts via an internet search engine, using tools such as Google Alerts. Most small business owners may know to set up alerts on their own company and their competitors. However, there are several drawbacks to relying on free web alerts to monitor your customers. The main problem is that the alerts you receive might not be relevant to risk management. For example, you may be sent a headline about a longtime employee retiring. Or if a company on your alert list has a generic name, such as “ABC Manufacturing,” then you may be sent an article that mentions both “ABC” and “manufacturing” but is not, in fact, about your customer ABC Manufacturing. If you have dozens or hundreds of customers, that’s a lot of emails to sift through.

How to Use Credit Monitoring to Make Informed Decisions

When a company manages less than a hundred accounts in their credit risk management software, it’s not difficult to read every alert and decide whether to take action and perform an account review and reevaluate credit. When the company has hundreds or thousands of accounts, it’s crucial to customize alerts so you only receive them for situations that are relevant to your company’s review policy (typically part of a company’s overall credit policy). These types of alerts can include:

  • Bankruptcy filed
  • Business credit scores improve
  • Business credit scores deteriorate
  • Business structure change
  • Company went out of business
  • Lawsuit, lien, or judgment filed
  • Location change
  • Ownership or management change

Credit monitoring alerts like the above can lead to different actions that help you make informed decisions. If you receive an alert that a customer has moved to a new location, you’ll want to make sure your billing and shipping addresses are up to date, but this doesn’t require a comprehensive credit review. If you find that a customer’s business credit scores have improved or the company went from an LLC to a corporation, this might mean you can increase their credit limit. On the other hand, if their business credit scores deteriorate, that might signal they are late paying other creditors on time due to cash flow issues. Finally, any lawsuits, liens, or judgments filed could call for the account to be placed on a credit hold and a notification sent to the salesperson.

These types of best practices in credit risk monitoring provide a set of guidelines that credit managers can use to proactively maintain their accounts. Once a customer has satisfactorily repaid an initial extension of credit, it’s of course much easier to extend it to them the next time. But remember, that doesn’t mean you never again need to check your customers’ credit – managing risk is a process, not a one-time event.

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