Credit & Risk

How to reduce credit risk

3 Mins

The modern-day credit manager has many responsibilities, but one of the most pressing is to reduce credit risk. When extending credit, there is always an element of credit risk that needs to be carefully balanced to avoid falling victim to late payment or bad debt. However, there are a number of ways credit managers can reduce risk effectively.

Chapter 1

Determining creditworthiness

Using business credit reports to judge the creditworthiness of potential borrowers can reduce the need to chase late payments from your customers, and time that could be invested elsewhere in the business. 

There is also the risk of late payments turning into bad debts for your business, which can lead to credit scores being affected, and alerts being sent to your suppliers which can affect their want to work with you.  

Chapter 1

Know Your Customer (KYC)

Know Your Customer is a regulation that is required by law in certain sectors, such as financial services, fintech and buy now pay later services. Every business should be running the correct due diligence before offering business to customers. 

Creditsafe ID complies with all the standard 'Know Your Customer' practices. These can be used by almost any company for general due diligence when verifying new customers, suppliers, and employees.

Not only when onboarding new customers, but businesses should be implementing the same process for their customer portfolio as the business world moves at such a fast pace. 

Find more information about KYC in our blog post here.    

Chapter 1

Conducting due diligence

A business can follow specific due diligence procedures that can help strengthen its credit control process. When assessing the creditworthiness of a customer or supplier, it's always advised to run a simple credit check and view their credit rating, financials, and any latest events that could impact your decision-making process. 

Some businesses claim they have dealt with their customers for years, so don't need to worry about customer due diligence (CDD). However, it is wise for you to keep CDD up-to-date for all your clients. You may have sufficient documentary ID details on your files but if there has been any subsequent change to their circumstances or risk profile, you should update your CDD, which should be reviewed on a regular basis.

Looking to simplify your onboarding process? View our webinar with our AML/KYC specialist here.

Chapter 1

Leveraging expertise

Using Creditsafe, you can monitor companies that you plan on working with by creating bespoke monitoring lists, and you can automatically add a company to a monitoring list. This can help you easily track any company changes with instant emails sent to notify you. 

It's also worth checking if any of your existing customers are working with companies that you could be having trouble with, especially regarding payment behavior.   

Chapter 1

Setting accurate credit limits

When setting accurate credit limits, it's important to see if their sales are trending up or down. Assessing financial health is a vital stage in determining a credit limit, and you can face many questions. Is the sector struggling? Are they currently facing any challenges? How do the company profits, net worth, and shareholder funds look?

Once all financials are assessed, set the credit limit accordingly to your findings. However, if there is a risk of potential exposure, you could adjust the credit limit to avoid any issues with customer relationships. 

Looking to reduce credit risk?

Access a free business credit report and have full visibility on a potential customer or supplier financials.