Ideas to minimize credit risk and make losses more palatable to management

how to minimize credit risk

Regardless of the industry you are in, credit risk management is a difficult, stressful and inexact process. As a consequence, most of us hope for the best and expect the worst after making tough credit decisions throughout our careers.

These are some ideas to minimize credit risks and make the losses that occur more palatable to senior management:

Inform management of potential credit risks. Try to define or describe the severity of the risk rather than simply describing the customer account as high risk.

When you as credit manager feel that the risk of doing business with a particular customer is too high, but you recognize that the customer in question is strategically important to your company involve senior management in the decision about whether or not to continue to extend credit to that company, under what terms and conditions, and at what credit limit.

Keep management informed about the tools used to evaluate credit risk.

When appropriate, ask management to approve or at least to comment on the risk assessment process.

Depending on the size and potential risk of a specific decisions being made, it may be necessary or appropriate to request their approval for the credit limit and terms required by the customer.

As problems emerge, give senior management a 'heads up.' The only thing worse than the credit manager delivering bad news about a customer is when the news is a surprise or a shock to senior management.

Rate credit risks as being high, medium or low risk based

on both the probability of a problem and the potential size of the problem if it occurs.

For each 'problem' account that you identify, consider risk mitigation strategies such as reducing the credit line, shortening the credit terms, requiring security, or at the very least flagging the account in question for more prompt follow up and for more frequent credit reviews.

If the risk is serious, try to develop contingency plans that will reduce the impact on your company if payment default does occur.

Use your education, experience, intuition, and access to outside sources of information, and job skill to identify and track potential problem accounts in order to avoid serious delinquencies and payment defaults.

One final thought: No matter how carefully the credit department does its job, there will be times when the company's business needs take precedent over credit risk management considerations. This usually results in an override of the credit decision. Keep in mind, this is not a criticism of the credit department - it is an economic reality for many businesses. If and when your attempts to limit credit risk and control delinquencies are thwarted by decisions made by senior management, it is important not to take it personally. In fact, the best approach is to acknowledge management's instructions [preferably in writing] and assure senior management that you will do two things: [1] that you will do your best to manage collections carefully, and [2] you will promptly inform them if and when collection problems arise involving management override accounts.

Source: www.coveringcredit.com

Category: Credit

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