07.29.2021 | Posted by Erik

5 Credit Investigation Best Practices from an Outsourced AR Firm

Have you recently onboarded a new customer on terms? Here’s how we handle credit investigations for companies that outsource accounts receivables with us. Following these best practices to vet new companies can mean the difference between a profitable relationship and an expensive headache.

Our Top 5 Credit Investigation and Approval Techniques

As an outsourced AR company, it’s our experience that the most common AR problems—aging receivables, difficulty collecting, internal tension between sales and credit teams—are preventable.

The thrill of the sale in the moment can easily overshadow an equally important part of the equation: preventing losses. Without the right steps in place to do your due diligence, accounts on credit can become major problems down the road.

We get it. No one wants to turn away business. The good news is, with these best practices, your company can grow its revenue without increasing risk.

#1 – Use a credit application.

Credit apps are the best way to gain a high-level look into your customer’s creditworthiness. Check your customer’s credit using a business credit firm like D&B or Experian to learn their general financial health and behavior.

While credit apps are a great place to start, they don’t necessarily tell the whole story. One common area where things can be skewed is reference checking. Companies are more likely to pay their high-priority vendors first, which are often the same vendors they list as references. It’s important to keep this in mind and not depend solely on reference checking for credit approval. If you’d like to see a template you can use for a credit app, contact us.

#2 – Do your homework.

Depending on how large the contract is, it will be important to do more due diligence beyond credit. Here are three additional items we usually check on behalf of our outsourced AR clients, especially for large volume contracts:

  • Study the company’s financial statements. For private companies, have your customer sign a release authorization and learn more information about them directly from their bank. What’s their monthly average balance? Do they have a history of bounced checks? Are their accounts up to date? For large credit lines, always check the customer’s balance sheet and profit & loss report. Are they profitable? Do they have a lot of debt? If these financials create more questions than answers, set up a discussion with the CFO or a person in the finance department at the customer.
  • Consider how long they’ve been in business. Even if they may have a couple of spots on their record, businesses with more years under their belt tend to be lower risk: they typically have weathered some storms, work in a viable market, and have an established customer base.
  • Check the Secretary of State business records. If a business can’t manage to be in good standing with the state, how can you expect it to stay up to date with payments to your company?

#3 – Set a credit limit and stick to it.

Many companies set a credit limit (the maximum dollar amount they will sell to a customer on terms, also called trade credit)——and then ignore it. If a customer hits their limit, use that as a reason to get more information that will give you comfort to increase the line. Consider the customer’s order size and how often they’ll reorder (the more frequently they reorder, the more leverage you’ll have to get outstanding invoices paid before shipping new product).

Establishing a clear and well thought out plan for how to manage credit at your company can help simplify your life and protect you from credit losses.  Coming up with it on the fly will increase the likelihood of losses and allow the pushiest people to take advantage. All companies will have a different appetite for risk and both your finance and sales team should know where on the spectrum management falls.  No matter where you land, the most important advice is to utilize any leverage you have to your advantage.  If your customer is past due and wants an order, hold it until you get a firm payment commitment.  If they are continually at their credit limit and you aren’t comfortable exceeding that amount, use it to get more information. Consider asking for early payments to reduce your exposure or get updated financials from the customer to evaluate whether an increase in their credit line is warranted.

#4 – Put written procedures in place.

When you put procedures in writing—and stick to them—you align your departments and help avoid future issues. When employees across departments aren’t on the same page about existing accounts, it can create tension, confusion, and double standards.  If your company is super aggressive with sales, the finance team should know ahead of time what an acceptable dollar amount of credit losses for the year is.  If your company is very conservative and wants no losses, the sales team should understand that only the most creditworthy accounts will be approved for terms and can adjust their process (and mentality!) to align with this.

Without clear procedures in place, small errors may lead to major accounting problems. If a salesperson neglects to get the correct information for the accounts payable contact, invoices may go unread. If you process a multimillion-dollar order with a customer in dire credit straits, you may end up having to write off major losses.

Stop the problems before they start by putting everything in writing and ensuring that all parties are in agreement before fulfilling the first order.

#5 – Say goodbye to preventable collection problems with outsourced AR.

When it comes to accounts on credit terms, many avoidable problems start from within.

While everyone in your company shares a common goal, your sales and credit departments have different objectives. It’s the sales team’s job to grow revenue. It’s the credit team’s job to prevent losses. It’s not surprising that they may run into disagreements every once in a while.

Outsourced AR can help take the friction out of your interdepartmental relations. Because gaining revenue is very important—but until that AR gets paid it’s meaningless. When you outsource accounts receivable 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.

Axim works as your first line of defense, taking the right steps up front to prevent problems before they happen, and working hands-on with your customers to figure out a solution when they do arise.

If you want to outsource accounts receivable to lower your risk when investigating and approving new customers, contact Axim today for a free quote.