While there were no earth-shattering findings in this survey (we didn't expect any), we did collect a lot of insights that we trust you will find useful when comparing your credit-setting policies with those of other credit organizations. We think you will find this summary based on 23 participants provides a clear picture of the popularity of industry-standard practices in regard to credit limits.
Observations:
- A majority of respondents use anticipated order volumes, a credit limit scorecard, and/or reported high credit
- The “Other” category includes:
- Credit Insurer Sets Limit
- Project-based lien/bond claim rights
- Payment History
- Financial Statement Analysis
Observations:
- Over 8 out of 10 organizations have multiple roles approving credit limits
- The Credit Department Head always has a role is setting limits, but in a majority of companies, so does the CFO
- The “Other” category included
- COO
- Finance Committee
- Parent Company
What is the key principle or principles that guide your credit limit decisions?
Volume, length of time in business, management experience, the strength of financials, debt, and security.
- Length of time in business > One Year. 2. Equivalent dollars with other trades paid satisfactorily. 3. No liens suits or judgments filed within the past two years or not released.
Limits up to $50k based on personal guarantees and credit bureau data, including risk scores (business failure and delinquency), years in business, and a number of employees. More significant credit limits are based on financials, corporate guarantees, and security/collateral.
- Payment history.
- Vendor history; high balance.
- Business longevity
- Sales expectation
Depends on limit amount: Scoring models up to $500,000 (model has 10 components and weights) >$500,000 model plus financial statements - credit limits set based on credit worthiness plus annualized sales volume and pay terms - also utilize security instruments such as UCC1, L/C's, Guarantees, ROT, etc. - will take more risk if secured.
Credit worth is based on various credit reporting, trades, and history combined with need based on sales volume potential
We use a scoring system in D&B's Finance Analytics
Percent of companies working capital/payment history
Trade references, Credit Bureau ratings.
Financial info and when necessary, credit insurance
Credit Insurer sets all limits. The only limits we set are discretionary under $5K.
Business opportunity and financials.
Limits are extended especially by other creditors in our industry (transportation). For large limits, financial analysis is done. Only if credit reports do not have sufficient information on small customers, we will contact references provided on the application.
Profitable with a strong balance sheet. YOY growth.
The response of credit references, and reports showing on-time payments
Working capital, the longevity of the business, credit rating
Ability to pay (as measured by financial statements, access to bank facilities, and capital markets). Willingness to pay on time (payment history, character).
Length if time in business, payment history to similar trade creditors.
Trade reports, References, Financials, and Corporate record filings.
If there is more than one person in your company setting credit limits, how do you ensure consistency across your AR portfolio?
CFO determines President approves. Finance Committee approves CFO recommendations for new customers or those with credit over a certain (high) amount.
Yes. Credit Policy and Authority Matrix.
The credit manager is the only person responsible for credit limits. That person reviews all obtained credit information to make an informed decision. This maintains consistency across the board.
Dedicated Credit Risk Department utilizes a new customer credit scoring model up to $50k. After that, financial statements are requested and reviewed by members of Credit Risk.
Approvals are based on credit authority limits.
Global Credit policy with consistent LOAs - use one primary service provider and standardized scoring models that are used globally.
We have a policy that everybody follows regarding documents required and credit reports run, approval can be subjective beyond based on individual approval but is mitigated by the policies in place.
Credit Manage can approve Credit limits up to $500K Controller approves beyond $500K.
Internal controls - signed off documentation for all approval levels. A daily report is run with sign-offs.
Training
The Credit lead oversees the recommendations from credit staff to ensure compliance with our policy as well as maintain consistency.
Basically, one person is setting limits and sending recommendations up the ladder for approval. Have been working to train additional people by giving smaller authorization approval and walking through my reasoning with all new customers.
No, I am the only individual that sets the limits. I make the recommendation based on the financials & forecasted sales/credit terms to the CFO with the information supporting the recommendation and then it's approved as required by our policy.
The credit manager (myself) determines the limits and terms on all accounts.
All are reviewed by the Credit Manager and/or COO
We divide work by salesperson. Each Credit person handles all of a salesperson's customers. They learn how to work with each other and what to expect from each other. It has worked well for 69 years.
Yes. Starts with a range within the scorecard as well as anticipated sales volumes.
The standardized process includes a financial analysis template.
Editors Note: Several respondents replied “No” indicating they do not have a policy in place to ensure consistency when more than one person is setting credit limits.
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