After the Credit Application: Getting to Know Your Customers Even Better
Sources of Customer Intelligence and Deeper Insights Post-Credit Approval
The better you know a customers, the easier it is to make a correct credit decision. Seldom is a poor decision made when there is ample information. One of the biggest challenges for any credit function is making a valid decision when information is lacking. That’s why standard procedure calls for gathering additional credit information until a comfortable decision can be made.
When there are time constraints that forestall additional research, denying credit or requiring collateral or some other security is the best way to avoid a decision that results in delinquency and a potential bad debt loss. In so doing, however, you may be foregoing the opportunity for a profitable sale or causing the customer to buy from another vendor. The same goes for restrictive credit decisions, which are a common fallback when there are insufficient insights to justify a credit limit that meets the customer’s purchasing requirements.
Initial Sources of Customer Insights
The new customer credit application is typically the initial source of customer credit insights, though a credit bureau score or rating will, in some instances, suffice for relatively small dollar transactions. Credit applications, however, don’t provide much in the way of credit insights unless a financial statement is included. Any company demographic information collected on the application may help inform a decision, but otherwise, a credit application serves to capture other sources of information such as bank and trade references.
Credit bureau reports are often used to confirm and complement the information provided through a credit application and, in some cases, may serve as the primary source of credit information. Unfortunately, many commercial credit reports, especially on smaller businesses, only contain a limited number of trade lines, so they don’t provide much insight into the subject’s payment habits. This is unfortunate because any trade references supplied on the credit application are likely to be for the three or four vendors the applicant always pays in full and on time. It’s anybody’s guess how the applicant pays other vendors.
Other credit insights for new accounts are typically provided by sales or customer service representatives. This information is typically captured in a customer relationship management (CRM) solution. Moreover, much of this CRM data will have been collected during the prospecting phase of the relationship and can be very useful for rounding out your initial impression of a new customer. A final place to go for information about a new customer is the Internet. The company's web page can be informative, as well as news articles, and hopefully, the key insights from this information have already been brought into the CRM.
After the Credit Decision
Once you approve a customer for a credit limit, data collection is not over. Business credit is very dynamic, especially across a portfolio of accounts. Today’s low-risk customers can very quickly become tomorrow’s high-risk accounts. That is why an accounts receivable portfolio requires constant monitoring, which requires you to continually collect information on every customer, not just order an updated credit report every year or two.
Also, the monitoring needs to begin immediately. You can’t wait six months or a year to begin the monitoring process simply because unexpected stuff happens. Dun & Bradstreet reports that roughly one in five businesses have significant changes to their credit file every year. You should expect a similar percentage of changes within your customer portfolio.
Another reason monitoring should start from day one is that your initial credit decisions may need adjustment. Reviewing your decisions after three to six months of selling to a customer is a best practice too many organizations don’t follow. Among other things, you will need to make adjustments with every customer that regularly requires collection efforts beyond an initial past-due reminder. Reducing credit limits or requiring collateral or other credit enhancements should improve the situation. Even just informing the new customer of the actions you will take unless their payment behavior improves can help get them in line with your terms.
You should be especially strict with new customers that only make small purchases. In many cases, having any of these accounts that exhibit delinquent tendencies pay with a credit card when they place their order will be more cost-effective than your subsequent collection efforts. In addition to the collection cost of going after small balances, these accounts divert time away from your more important customers.
Open a Credit File
All the subsequent information you collect on a new customer needs to be kept in a credit file, preferably electronic, which can only be accessed by credit personnel, or those in the credit area’s chain of command. Anybody with a PC can establish an electronic credit file. Paper documents can be easily scanned and saved in this file. If multiple people need access to customer credit files, the e-documents can be kept on a secure server. Most, if not all, credit and collection software solutions will provide for electronic credit files, as will most ERP or accounting software products, so there is really no excuse to maintain paper files—just make sure the customer credit files are constantly being backed up.
The credit application, signed credit agreement, trade and bank references, credit report, sales information, and anything else collected during the initial credit evaluation needs to be kept in each customer’s credit file. So does any information you collect subsequent to the initial credit evaluation, which information will be discussed forthwith.
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