Objectives of Credit Risk Management

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It’s not unusual for a small business to both implement and abide by the rules of a credit risk management policy. The goal is to set and maintain a balance between the risks and rewards of extending credit. A business that both extends credit to its customers and is itself a credit customer experiences both sides of a process that works to ensure a company remains financially healthy.

Create a Decision-making Framework

Policy directives establish a clear, unbiased process for collecting information, processing credit applications and dealing with slow paying customers or those who stop paying entirely. A well-developed decision-making framework is vital to detecting fraudulent applications, reducing the number of accounts in collection, reducing write-offs and minimizing losses that can result from making judgment calls, especially with customers having mid-range credit scores or a mix of both timely and late payments.

Establish a Communication Policy

Credit-based risk management communications focus on what and how you distribute information to your customers and employees. External communications that describe your credit policy and make sure customers understand debt collection procedures can reduce late payments and default accounts. Internal communications define company-approved methods for distributing information, which for most companies includes both written and electronic methods. Internal communications objectives also work to make sure your employees receive timely and accurate information.

Create Internal Accountability

Even a well-thought out and communicated credit risk management plan won’t work if your employees don’t take it seriously. Internal accountability objectives focus on internal controls such as separation of duties, transaction audits and mandatory authorizations that make sure employees in every department comply with credit-risk management rules. For a business that extends credit to its customers, accountability also refers to complying with federal consumer credit regulations as required in the Sarbanes-Oxley Act and in the Credit Card Accountability, Responsibility and Disclosure Act of 2009.

Balance Risks with Good Customer Service

Balancing credit risks while providing superior customer service is a primary risk management objective. Well-defined credit-related customer service standards are vital to achieving this goal. These standards can include risk-based decision-making options, such as increasing or decreasing interest rates or a required down payment. This also means treating customers with respect and dignity no matter what a credit decision might be.

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About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

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