Denied!

Wall Of Protection

Given the current economy and the potential regulatory pitfalls, it is more important than ever to pay attention to proper credit denial procedures.

Surprisingly, many businesses, large and small, do not have a formal credit policy.  “The first step is to have one,” Shultz asserts. “It must be well thought out and have alternatives if an applicant or customer does not meet the criteria necessary for the level of credit needed. If credit is ultimately denied and there are no acceptable risk mitigation alternatives, it then becomes an internal business decision,” Shultz says. “It is critical for the credit policy to detail how exceptions will be approved, with a quick-escalation decision path.”

Another surprise is that many sellers fail to take advantage of the vast resources at their fingertips to screen for poor credit risks. “The mistake I see companies make is that they don’t use all of the sources of information that are available, such as Blue Book, Dun and Bradstreet, and other credit reporting services,” Amendola says. “Do all of the research you can, including reading newspapers online in cities where you plan to sell.”

Shultz adds three more common mistakes: “First, credit does not have a seat at the decision table until after the decision has been made,” he delcares. “Or in many cases, [the credit department’s] decisions are routinely overridden.  Second, there is no consistent and well thought out credit policy that everyone agrees to or understands. A good credit policy,” Shultz explains, “is one aimed at approving all potential business that can bring revenue to the company and is within the risk tolerance of the company.

“Third, analysis [should be] done the old-fashioned way. One bureau’s rating is considered, not trade information from a variety of sources. There is a lack of integrated scoring or automation, and predefined workflows to ensure quick decisions and exception reviews.”

But can these steps be done internally, or should an attorney be retained?  Amendola believes this “depends on the amount of money at stake—if hundreds of thousands of dollars are involved in a deal, it may be wise to engage counsel.”

To further improve the credit approval and denial process while reducing legal exposure, Shultz suggests, “Credit should be involved before a deal is made; this will enable sales [personnel] to go in well informed as to the potential line of credit or if special arrangements are necessary. The keys are to be fair, consistent, and predictable.”

Next, Shultz says, is automation: “Automate the collections and dispute management process. Added visibility and consistency of approach reduces the number of surprises if a customer slows payments or increases the number of unwarranted disputes,” he explains. “Keeping up on collections and trends reduces the risk of nonpayment and can help considerably if a customer asks for additional credit and a decision is needed.”