As a credit manager or analyst, your job is to help facilitate risk-based credit decisions by defining and identifying areas of risk. It’s a complex role because so many factors must be taken into account:
- Can you give high risk borrowers terms or products that will help them and protect your lending institution or company?
- Can you safely improve the profitability of low-risk borrowers with better terms or increased credit limits?
- Are there ways to improve medium-risk borrowers’ chances for approval?
These are tricky considerations to balance that require thoughtfulness, time, data and insights so that you can make consistently correct credit decisions.
Successful credit managers and analysts have one thing in common – they execute their job responsibilities efficiently. Here are four ways you can become a more efficient credit manager or analyst:
1. Develop a distinct approval process
If you don’t have a formal process, or if you have one that is old and needs to be updated, you should set out to develop a well-defined process that is repeatable and consistent so that all staff members can easily and regularly follow it. A consistent process will yield consistently better decisions.
Relying on a slow, manual review of credit reports as the sole means of evaluating borrowers is inadequate and inefficient, especially by today’s standards. Adopting a credit scoring strategy, by using a score value that you can build risk around, is a much more efficient and effective way to quantify credit risk. Score models can even be customized based on your unique customer portfolio.
It is also important to incorporate the automation of decision policies when developing your new process, and there is software that lets you do just that. You can automate the data process and include scores to create decision parameters. By doing this, you can turn risk assessment into an actionable strategy that shortens turnaround times and improves processing capacity.
2. Properly vet your customers
When making credit decisions, it is critically important that you have a complete and accurate understanding of your customer’s true financial situation. This is especially important when you are making a credit decision about a small business.
Begin by pulling a business credit report so you can review things like:
- The business’ operational structure
- Its business and payment history
- Financial performance
- Public filings
All the data included in the report is analyzed and a business credit score is calculated which essentially sums up the business’ creditworthiness. But make sure the reports you use contain data that has been verified – and is not self-reported.
Another smart way to vet a business is to pull a business owner report. Entrepreneurs often fund their businesses using their personal credit. So, by reviewing the business owner report you can see how well they manage it, if there are any credit issues that may be concerning, and you can determine whether to extend credit or require cash up front.
3. Invoice effectively
Another way to make credit management more efficient it to develop a more effective invoicing process. It will not only help protect cash flow, but it will also ensure payables.
Begin by sending invoices promptly. If you delay issuing them, you give your customers a reason to stall making a payment. You should also do a little research to determine if a company typically takes a long time to pay or has a history of not paying so you can charge up front rather than after the fact.
It’s also a good idea to transition to a digital invoicing system in order to speed up the process. These systems eliminate the need to print, mail and process hard copies of invoices.
4. Monitor customers for changes
The pandemic certainly impacted many small businesses – some positively, but most negatively. As we emerge from the grip of COVID-19, it’s more important than ever to keep a watchful eye on how your business customers are performing. Are they adjusting to the new normal? Or are their finances shaky?
The good news is, there are automated solutions that can substantially improve risk management by alerting you whenever there are any changes to your customer’s financial health. You can set up monitoring for score changes, legal filings, and even damaging behavior. By putting a monitoring solution in place, you’ll be better able to detect problems and respond to them quickly in order to reduce your risk.
Efficiency is everything when it comes to analyzing and managing risk effectively. These four tactics, when implemented properly, will set you on your way to improved credit decisioning and management.