While the long term objective is to ensure that a company takes reasonable risks, and buys risk protection (e.g. credit insurance, without recourse factoring, or letter of credit confirmation), there may be specific occasions when, for sales purposes, or to keep a factory running, high risk transactions have to be undertaken.
Insurers and lenders will be keen to see that the company is well managed. The quality of a company’s credit risk management is immediately visible in the financials through the aged debtor analysis and the receivables shown on the balance sheet.
The company should ideally have a written credit management policy that sets out the management procedures for minimum risk. This is especially important where the company has more than one business site.
By adhering to a uniform set of procedures, the credit managers ensure that minimum standards are being used for the protection and management of the company’s assets, and this provides a level of comfort to the company and to the lenders.