What Is Credit Decisioning?
Credit approval or decline (Credit decisioning) is the process a business owner or credit professional goes through when deciding to extend payment terms to a new customer. It can also be used to perhaps increase the limit of an existing customer.
Many factors must be taken into account before you can arrive at an objective decision (see the 4 C’s of Credit Granting). I emphasize the word “objective” because it can be challenging to remain objective if your boss is hungry for a new customer or is putting undue pressure on you to make an approval when every nerve in your body is screaming otherwise.
According to the Credit Institute of Canada, the Role of the Credit and Collections Department in Business is first and foremost, to Maximize Sales. However, many salespeople sometimes call the credit department the “NO” department, where all new credit applications go to die.
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Why Do Companies Grant Credit?
Let’s examine the purpose of credit granting; then, we can understand how to decide best who to extend credit to or not.
Advantage to the Customer – Extending credit to customers allows them to purchase goods or services from you today, and then use your products or services to generate revenue from which they can repay you. Instead of borrowing from their bank, they borrow from you.
Advantage to Your Business – If you feel your customer is a reasonable risk, then granting credit to them allows you to book the sale and add revenue to your business. If your customer repays their debt to you within the agreed timeline, then everyone wins.
Credit Decisioning Process for Business Growth
Credit decisioning in favour of approval means acting as the bank for your customer. Offering credit can increase revenues and have many positive outcomes for your business:
- You become their preferred vendor, which should result in repeat business.
- Offering repayment terms can be a competitive advantage if your competition does not offer credit terms.
- If the customer does not pay within the terms of your agreement, you can collect a reasonable interest charge from your customer for the use of your money.
- Being aware of your risk can enable you to offer even better terms to your customers if their seasonal purchases tend to be large. For example, a customer’s usual order is valued at $50,000, but because your customer’s credit rating is excellent, you allow them to purchase $75000 and offer extended terms or perhaps a small discount.
Credit Granting Decision – When Shouldn’t You
A few bad credit decisions can pose an existential threat to any business. The most common pain points are:
- Giving credit terms to a person or company without a thorough risk assessment
- Not listening to your customer or marketplace for the top twelve warning signs of financial constraint.
Business publications abound with news stories of household name companies who have gone out of business because they were highly leveraged when one of their major customers went into receivership unexpectedly.
Prudent credit granting and account monitoring serves to protect your business and alert you to potential problems.
However, if your firm doesn’t have a credit person on staff, or you are hesitant to add to your staff count, many business owners and finance professionals turn to outside partners like PCM Corp to help them with credit application processing.
Contracting out the credit decisioning process may make some businesses nervous. At PCM Corp, we recommend an information-gathering meeting first to determine what risk levels may be appropriate based on your:
- And Personal Risk Tolerance
Using an Outside Vendor for Credit Decisioning
The advantages of using an outside vendor for credit decisioning are numerous and may include:
- Arms length relationship to you and your customer for a completely objective opinion.
- Outside certified credit professionals with decades of credit granting experience in many industries.
- Only pay when you need the work.
- The vendor is highly motivated to ensure you are looked after and are much easier to “fire” if you are unhappy for any reason.
- Second opinion – Many creditors have credit staff on payroll yet use a credit management vendor for second opinions on larger deals.
Let PCM Corp Help!
Priority Credit Management Corp (PCM Corp) has been helping Canadian businesses with credit control for many years. Our staff can provide on-site and offsite credit decisioning by either working in your office or having credit applications sent electronically for fast processing.
Our clients tell us that using our service to perform credit checks and provide guidance is “Inexpensive Insurance” when compared to the potential losses and mistakes that our services have kept them from incurring.