Ten Tips on Using Credit Holds Properly

1. Anyone placing an account on hold must have a clear understanding of their employer’s tolerance for uncertainty and credit risk.  They should also know the history of the account being considered for credit hold including how long the debtor company has been a customer, and how much they purchase on average per year.
2. Basically, credit holds should be used only as a last resort.  When used improperly, the credit department can win the battle but lose the war meaning the credit department can “win” by collecting the past due balance and lose by losing the customer permanently in the process.
3. As a rule of thumb, credit holds should not be used when the customer claims that an unresolved dispute prevents them from issuing payment.
4. Limit the number of people in the credit department with the authority to place an active account on credit hold.  Anyone should be allowed to recommend a credit hold, but only individuals properly trained and with an understanding of the goals and risk tolerance of the credit department and the creditor company should have the authority and the ability to place accounts on credit hold.
5. The same rules would apply to removing credit holds, and to approving shipments of “emergency” orders to customers on credit hold.
6. Whenever possible, the customer and the salesperson should be warned ahead of time that a credit hold is under consideration, and how the credit hold can be avoided.
7. If you work for a manufacturer, always decide whether an account going on credit hold should also have purchase orders already submitted placed on production hold.
8. If you are willing to ship customers that have been placed on credit hold on COD terms, you lose leverage to force the debtor to clear the past due invoices.
9. Make sure that you have closed every loophole that could result in an order for a customer on hold being released without your approval.
10. If and when a customer on credit hold pays the past due balance, the credit limit should not automatically be re-established.  If an account was far enough past due to warrant a credit hold, the credit file should be updated and the customer evaluated to determine (a) if open account terms are still warranted and if so (b) what credit limit and payment terms are now appropriate.  

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