Introduction to Credit Risk Management


Now more than ever, you need to increase your working capital in order to protect your business. With a global recession and pandemic in place, this means that the normal business climate is no longer applicable. Businesses are in disarray as they navigate through these changing times. It is definitely possible that some of your customers will be unable to pay your business if you sell on credit terms. You need to understand credit risk in order to protect your business and to preserve your working capital for solid business health. Credit risk management is essential.

What is credit risk management?

Credit risk management is the process of lowering the risk of customer non-payment by providing reasonable credit limits and terms. There are a lot of components involved in managing credit risks, but it’s crucial to have a process in place.

What is a credit limit?

A credit limit is a cap on the amount of credit you extend to a company or individual. Use personal and business credit monitoring services from CINCB to analyze the credit history of your clients. Additionally, you can ask directly for trade or credit references. Start out setting the credit limit low and increasing gradually over time with early or on-time payments. It’s best to be pragmatic. Having too low of a credit limit means saying no to new opportunities. Having too high of a credit limit means you might get burned if an individual customer defaults, or a business client goes under. Checking business credit through business credit bureaus and requesting trade references are two ways to assess credit limits. You need to always assess credit, references and business growth.

What are credit risks?

Credit risks boil down to clients that could hurt your business by not being able to pay. Be careful to avoid credit concentration. A concentration refers to a high amount of credit extended to one account. The risk is that if that business or individual fails to pay, your business could be crippled. It is best to avoid concentrating credit with one or two accounts. Manage the amount and repayment terms in order to mitigate this risk.  

Managing credit risk

Managing credit risks require time, experience, and effort. It can be difficult for a small business to divert resources to credit risk management. This is where utilizing a third-party. CINCB offers credit monitoring, debt collection and professional advice to mitigate credit risk.

Bottom Line

When you run a business that extends credit to its customers, you have to always manage the credit risk in order to preserve and protect your working capital. Do your homework, have a good credit policy in place, and set clear terms that help you protect your downside. When accounts become delinquent and unmanageable internally, an outside party like CINCB stands ready to assist your business.

Contact CINCB today with your questions. As a reminder, you can find sample documents, a credit policy handbook, and more on our website. Just click here to download. To get started right away and access all the tools you need, click here to become a member.

CINCB has been established since 2002 to provide debt collection and credit reporting services. CINCB serves over 260 creditors locally and internationally with a local team of highly experienced agents ready to serve you.  Services are delivered fully online at www.CINCB.ky.  Contact us today to find out more.

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