05.22.2023 | Posted by Erik

5 Best Practices for Credit Review and Investigation

5 Best Practices for Credit Review and Investigation

Do you love bringing in new customers on terms? Most companies don’t, and for good reason. It can be complicated and cumbersome, and often lead to expensive oversights.5 practices for credit review and investigation

This is the second article in our series on best practices for AR success. Today, we’re covering credit investigation tips curated from our outsource receivables management experts. Organizations of all sizes outsource receivables management to us, and we’re happy to share the best practices we’ve learned for establishing truly profitable customer relationships.

Tips for Effective Credit Review and Investigation Processes 

What is your current process for undertaking a credit review and investigation for new customers? The truth is that many companies simply don’t have a process. This is understandable; when in growth mode it’s tempting to take any order you can get, no questions asked. Sometimes that can work out – until it doesn’t. Often, you won’t run into any problems until after the product or work is delivered and no one can be found to make payments.

However, the thrill of the sale should never overshadow another crucial component of a profitable business: preventing losses. It’s important to complete your due diligence ahead of time so that accounts on credit don’t become troublesome down the road. That doesn’t mean turning away business, though. It simply means following some proactive best practices so that you can grow your revenue with less risk.

  1. Get smart on the company.

    There are a few simple steps that can save you a lot of headaches down the road. Start by conducting some research on the company’s history. It might be worth implementing a policy where companies that aren’t incorporated pay up front. Additionally, you can always check the Secretary of State business records. If a company isn’t in good standing with the state, you can take that as a red flag. In general, consider how long they’ve been in business. Organizations with a longer track record may have a few areas for concern, but generally pose less risk.

  2. Stop sending new product.

    This is often easier said than done because it requires complete alignment across AR and fulfillment. If a customer is past due, there should be a process in place for how to handle any new incoming orders from them. No one is saying this is easy to figure out. It’s often simpler when you have a shipping department to build this step into the process. Additionally, things get more complicated for service-based companies. For example, if you’re delivering on a monthly retainer, without the proper processes in place, you may keep fulfilling the orders without ever knowing the client isn’t paying on time. This is why communication between AR and fulfillment is key.

  3. Document your credit approval process.

    What is your current credit approval process and how is it working? When you have procedures in place and documented, it ensures everyone is on the same page, helping avoid confusion and payment issues. To create more alignment around this process, consider the following:

    1. What is the approval process for both new and existing customers?
    2. What is the process when ownership of a customer changes?
    3. Do you utilize prepayments for difficult accounts or slow payers?
    4. Do you have leverage? Are you willing and able to hold orders until past dues are resolved? Obviously this is dependent on having repeat customers as one-off orders make it harder to collect.
  4. Understand your leverage.

    As mentioned above, leverage can be a key tool for collecting on past dues. What leverage do you have to ensure eventual payment? Are you willing to force customers to pay down an old balance in order to get new products or services?

  5. Consider outsourcing accounts receivable management.

    Many companies end up dealing with avoidable problems around accounts on credit terms. This makes sense since it’s the sales departments’ job to create orders and the credit team’s job to prevent losses. Naturally these goals aren’t always in sync. In these cases, you may want to outsource receivables management to take the friction out of interdepartmental relations. When you outsource accounts receivables to an experienced partner, you can trust that best practices are covered, helping you increase your odds of getting paid on time, avoiding costly errors, and eliminating internal tensions.

A proper credit evaluation is a fundamental part of collecting cash owed to you and reducing risk. Admittedly, it does take some time and effort to effectively evaluate credit and make AR decisions – that’s why many companies choose to outsource receivables management.

Reach out to Axim if you’re curious about improving cash flow and reducing risk. In the meantime, stay tuned for our third blog in the series, where we’ll cover the conversion to cash phase of a strong AR process.