CreditorWatch Risk Management
5 mins read

Why you need to manage credit risk throughout the customer lifecycle 

A lot can change across a customer’s lifecycle, whether that’s over a few months or 10 years. Just because a customer was in a strong financial position when you completed due diligence and ran their business credit check, doesn’t mean they’ll be as financially strong five years down the track. Particularly given the unstable economic environment we operate in these days.   

Ultimately, to get paid and stay competitive, you need to have an always-on, real-time credit risk management process. Credit risk management is an operational cost. However, it’s a situation where spending a little now can save you a lot down the track. There are four key benefits of managing credit risk throughout the customer lifecycle:  

  1. Minimise financial risk  
  2. Retain good customers  
  3. Boost productivity  
  4. Reduce costs 

Read on to understand exactly how credit risk management across the lifecycle of a customer delivers. 

One: Minimise financial risk

Unreliable customers aren’t just a hassle. They can be extremely detrimental to your bottom line. Too many of them and your whole business could be seriously undermined. If customers are slow to pay, or worse aren’t paying at all, then this puts your business at risk of being unable to pay your own suppliers or employees and can hamper growth with a lack of capital.  

Good ongoing credit risk management starts at the beginning of the customer lifecycle and should be a key pillar of your onboarding process. Credit risk management at the onboarding stage isn’t just about saying no to customers who don’t have a perfect credit history. It’s about starting the relationship with your eyes wide open and being able to make credit decisions that consider the customer’s credit history and overall financial health. Managing your credit risk like this means that you might say yes to new opportunities you previously wouldn’t have. But you’ll be able to optimise the deal and stay financially protected, trading with credit terms that appropriately reflect credit scoring and financial health. 

Effective credit risk management doesn’t end after onboarding though. A strong process continues to monitor customers’ credit risk across their relationship with you. Best practice monitoring should be in real-time and should alert you if a customer’s financial situation changes in a material way. You can then proactively manage risk exposure in both the short and long term. 

Two: Retain good customers

As we’ve already said, effective credit risk management isn’t a one-off event. It must be an ongoing practice that allows you to adapt to changes in a customer’s circumstance. That customer we mentioned above, maybe you’re a couple of years into the relationship. They’ve been paying their bills on time and have grown their business. Now, they want to increase the size of their orders and have credit extended to them. Instead of saying no, ongoing credit risk monitoring should allow you to quickly see if their credit risk level has changed since they were first onboarded. Instead of missing the opportunity and potentially losing them to a competitor, being up to date with their credit risk will allow quick risk assessment and decision-making. You’ll be delivering a better customer experience, as well as retaining and growing them as a loyal customer. 

Three: Boost productivity

Tension between teams is nothing new. And while we often just write it off as something that comes with having passionate staff who are motivated to hit their goals, it can cause headaches on several fronts. Sales will continue to sell and upsell to customers once they’re onboarded, thinking they’re good to go as all boxes are ticked. This approach can mean sales stay strong and growth of current customers continues. However, it doesn’t consider the fact that a customer’s financial situation can change. This is where ongoing, real-time monitoring of customer credit risk by the credit team can save a lot of hassle, financial pain and reduce tension between sales and finance. With real-time credit risk management, the credit team can adjust current customers’ credit limits proactively. Sales can be kept up to date with changes in customers’ risk levels, whether good or bad, allowing them to focus their efforts on selling to customers who are lower risk and a safer bet when it comes to getting paid.  

Automation and proactive monitoring and alerts built into your process reduces manual work for the credit team and allows sales to achieve targets in a way that is profitable and sustainable for the business. And in a way that won’t cause pain (or more work) down the track when it comes to collecting repayment. 

Four: Reduce costs

Credit risk management is an operational cost, but it’s an important one. At the end of the day, if you’re not getting paid then doing business will be tough. Chasing overdue invoices for repayment doesn’t just take a lot of time, it can cost a lot too. Aside from the time your employees are spending emailing and phoning trying to get payment there are also hard costs to collecting overdue payments. If you’ve reached the point where you are instigating legal action or are engaging debt collectors, you’re now spending hard earned money to get paid and minimise your credit losses.   

By proactively managing your credit risk end-to-end across a customer’s lifecycle you’ll be first to know if a customer’s financial health changes and a conversation is warranted. You’ll know when it’s time to revisit customer credit terms to minimise risk exposure, be able to prioritise where your payment chasing efforts are best directed and focus on higher risk customers to recoup the most cash possible. 

While it’d be nice to be able to just run a business credit check when onboarding a new customer, tick the boxes and file the documentation away, life isn’t straightforward. Financial fortunes change. Protecting your business from financial risk can mean the difference between success and failure. Managing credit risk over the entire lifecycle of your customer relationships is a smart, proactive step you can take to protect your cash flow and gain competitive advantage.  

If you’re feeling a bit exposed, get in touch with our team. They can chat through gaps in your process, how implementing best practice credit risk management can help your business and what stage of the customer lifecycle might be the best place for you to start. 

credit credit management credit risk credit risk management risk management
Product Marketing Manager
Lucy joined the CreditorWatch marketing team in October 2022. With experience across government, media and SMEs she loves working with companies like CreditorWatch that enable businesses large and small to improve their processes and work smarter.
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