Credit Approval Process

Certain procedures must be followed before a credit decision can be made. The relationship with the customer must be established; essential information about the account must be obtained, analyzed and stored; and the data must be evaluated so that the processing of future orders may be facilitated.  Customer relationships are usually initially established through the sales department by visits, marketing programs, and advertising and solicitation. Customer orders come through the sales department, which furnishes the necessary credit information about the prospective customer.

Few companies make shipments on open account to a new customer without some sort of credit investigation, although some companies will set a minimum first order amount, e.g., $500 or $2,000 depending on both the size of the seller and the industry. Information about the customer's banks, other suppliers, and accountants to contact should be obtained and investigated. Credit agency reports can also be used, as can direct interviews or correspondence with the prospective customer. The credit department is usually the only group, other than sales, to have substantial contact with the customer. This happens when the credit investigation fails to provide sufficient data to warrant approval of the amount of credit requested. When additional information is required, letters should be written, phone calls should be made or visits arranged to meet the management team of the customer and tour the customer's facilities.

Although the sales force is ordinarily not involved in the financial conversations with a customer, they should be kept informed about the fact that such discussions are ongoing or have been completed. Sales has the prime responsibility for dealing with customers, so communication should be a coordinated effort. Special documentation may be necessary. It may require participation of the attorneys for both the company and customer. A security agreement along with filings under the Uniform Commercial Code should be made if collateral is required. A guarantee or subordination, if agreed upon, should be prepared. A letter of credit and other special documentation may be called for in international dealings.

The credit file is the place for information on a customer's account, including its history and current status. It must be readily accessible but handled in a confidential manner. Many customers require that a confidentiality agreement be signed stating that all information will be held in confidence. Credit files should be reviewed periodically to sort out obsolete material and keep files manageable. Important documents such as those used to secure a credit transaction should be carefully stored, perhaps in a fireproof cabinet.

Financial statements should be analyzed, with appropriate tools and techniques to aid the evaluation. Statements received directly from the customer should be promptly acknowledged. All the information helps the credit manager to decide whether to approve or decline the request for credit. Determined lines or limits are an aid to processing further orders. A letter should be sent informing the customer of the credit decision and specifying the credit parameters of the relationship. This will minimize questions and future disputes.

Edited by Michael C. Dennis, author of "1001 Collection Tools and Tips."