Credit Risk Management Tutorial
Credit risk management is concerned with protecting a company's lending assets. This relates to money borrowed by company clients in the form of goods and services extended on a credit basis. Credit risk management reduces the risk of default or bad debt by establishing credit policies and procedures, analyzing new clients' credit and reviewing established credit accounts. Following these practices will help credit risk management protect the company's financial assets wholly and efficiently.
Other People Are Reading
Instructions
-
Credit Risk Management Tutorial
-
1
Draft credit policies and procedures. Before the credit department and credit risk management can effectively reduce lending risks, there needs to be established rules and practices. Credit policies represent the guidelines and rules necessary in the management of credit. This is based on management's determination of the level of risk the organization is comfortable with. In other words, it comprises the clients and credit extensions considered acceptable to the organization. Some organizations are comfortable with high levels of risk by lending to clients with lower or poor credit ratings. Other organizations are more conservative and have high credit approval standards to avoid payment delinquency and credit default. Credit policies will help to communicate what is acceptable within the organization by listing qualification requirements, loan amounts, types of customers, interest rates, collateral and other requirements.
Credit procedures list the methods for achieving organizational credit policies. This includes specific instructions such as what data is to be used in the credit investigation and analysis process. Credit procedures can also provide information for the credit approval process, account suspension and instances that may require management's involvement. Through the use of credit policies and procedures, departmental ambiguity is reduced. This allows the credit department and its employees to operate more efficiently.
-
2
Perform credit analysis training. Credit analysis training is a part of credit procedures. It includes determining the risk involved with lending to a particular consumer or business. Employees within the credit department should be familiar with how to perform the credit analysis process. This includes understanding the company's credit application, being able to pull credit reports from credit agencies like Dun & Bradstreet, calling credit references and being able to make an individual determination regarding lending risk. Employees must also understand the company's credit policies for acceptable levels of risk. Training should include the above-mentioned areas of credit analysis so employees have experience and understanding. This will help to fulfill the duties of credit risk management.
-
-
3
Perform credit review training. This practice requires the review of existing credit accounts to determine whether changes are necessary to minimize risk. Clients may experience financial difficulties that are obvious through late payments and partial payments. But actions such as a business closure or immediate default may not provide financial warning signs. By reviewing established accounts and their credit history, an organization stays familiar with the current credit situation of its clients and can take better action to reduce risk. This includes making sure all required credit paperwork is in-house (signed credit application or personal guaranty) and reviewing current credit limits to determine client eligibility. Clients may no longer qualify for high credit limits as they did when initially applying. Some clients may be eligible for higher limits, which may encourage greater purchasing and company sales.
-
1
Tips & Warnings
As part of any credit training, make sure the Fair Credit Reporting Act (FCRA) is adhered to. This is the law that governs how companies are able to share credit information they receive (see Resource section).
References
Resources
- Photo Credit management war image by Andrey Kiselev from Fotolia.com
