How to Audit and Rebuild a Dated Credit Risk Policy

How to Audit and Rebuild a Dated Credit Risk Policy

A credit risk policy sets forth standards, procedures, and definitions that guide the credit decisions made by a company, with the overall goal of mitigating credit risks.

As market conditions evolve and the financial situations of credit customers change, your existing credit policies may become out of date and inapplicable to evaluating new credit customers and modifying the terms governing existing ones.

By using reliable credit indicators, such as business credit reports and other financial data, you can revise and rebuild a credit risk policy to maintain low risk for your company while providing customers with the credit terms they need. Here are some ways to ensure a dated credit risk policy is up to date.

If you believe that a current credit risk policy is no longer valid, a careful audit of the policy will give you a foundation from which to make changes and revisions. With the assistance of credit managers and financial experts, plus data from business credit reports and other sources, assistance is available to assess how current credit risk policies are affecting your company.

If you believe that you are taking on too much credit risk, or that the evaluation procedures are not accurately identifying both good and bad credit customers, you can proceed to a detailed evaluation of your credit risk policy.

Look at elements of your credit risk policy and how you currently handle factors such as:

• Application requirements.


• Credit review policies and sources.


• Approval procedures.


• Credit limits.


• Prefunding, collateral, or down payment requirements.


• Characteristics of responsible parties.


• Financial and market conditions, both general and in specific industries.


• The role of business credit reports, references from other companies, or other credit data in your decisions.


• Signs of increasing or deteriorating credit worthiness.


• Procedures for increasing or decreasing credit limits.

When you have this information available, you can use it to rebuild your out-of-date credit policy. For example, if you know that a specific industry or business segment is experiencing difficulties, you may need to impose more stringent credit requirements for companies in that industry.

If your current sources for credit data and business credit reports are insufficient, you will know that you need to expand your acquisition of credit data to other credit reporting agencies and financial companies.

You may use a procedure such as the following for reevaluating and reestablishing a customer's credit standing (dollar amounts listed are for example only; your specific dollar limits may be higher or lower):

• Establish a threshold dollar amount for reevaluation of customer cre dit. For example, you may set an AR threshold of $200,000 for each customer.


• For customers with an AR threshold above $200,000, you may want to reevaluate their credit terms every month without taking action. Contact them every three months. Set new credit limits every four months based on the date you've collected over that same period.


• For customers with an AR below $200,000, you may feel comfortable establishing longer periods for reevaluation and resetting of limits. For example, you may reevaluate credit terms every four months and contact them every six months. New credit terms could be set up every eight months, as needed.

When you assess a customer's current credit worthiness, pay particular attention to factors such as:

• Credit history: Past credit behavior that indicates level of ability and willingness to repay.


• Company financial status: Customer company's debt burden, income, assets, and other indicators of financial stability.


• Credit limit: How much credit you are willing to extend to the customer.


• Frequency of credit use: How often, and to what extent, a customer uses credit.

Ansonia Credit Data's in-depth business credit reports and associated data give credit managers the data they need to make informed credit decisions and establish workable, mutually beneficial credit risk policies. Contact safe consulting services today for more information on our detailed, reasonably priced business credit reports and how they can help you when making financial decisions for your company.