A unique perspective: Why the credit team belongs in contract reviews

Most people associate credit with approving accounts and collecting invoices, but credit professionals often have unique visibility into the risks hidden within customer agreements and can identify issues before a contract is signed. 

Why it matters: However, some companies don’t refer to credit until a problem arises and by then it’s too late. The sooner the credit team is involved in the contract review process, the sooner they can mitigate risk and generate revenue for their business.

One of the ways credit professionals are uniquely positioned to identify financial and collection risk is their knowledge on business credit law, especially those who must manage different types of contracts. “Credit managers have the ability to catch buried contract language that may infringe on their rights to collect payment, which is something that sales may not be as familiar with,” said Ty Knox, ICCE, director of credit and risk at EFCO Corp. (Des Moines, IA). 

Where credit managers are more focused on mitigating risk, sales is more focused on sealing the deal, ensuring that agreements more accurately align with business financial goals. “The credit team can ensure that all the necessary documents are collected, especially when it comes to privately traded companies,” said Leslie Allison, CCE, senior credit manager at Joseph T Ryerson & Son, Inc. (Little Rock, AR).  “They can also make sure payment terms are what they’re supposed to be and account for price fluctuations that could potentially impact a customer’s ability to pay.”

Because credit professionals consistently stay informed on economic and market trends, they can detect risk before it happens. “When it comes to international accounts, we pay attention to country risk and set our payment terms accordingly, and depending on the risk, we may request cash against documents (CAD) or a letter of credit (LC),” said Melinda Parrish, CBF, senior credit manager at Archer Daniels Midland Company (Decatur, IL). 

Credit specialists are also well-trained in the art of negotiation, whether that be discussing payment term extensions or setting credit limits with customers. When paired with the sales team, businesses are more likely to find a mutually beneficial solution for all parties involved. 

For instance, a customer may try to change terms as an opportunity to renegotiate an agreement to find equitable terms, allowing them to maintain the relationship without exposing their company to too much risk. “I always try to help the sales team come to the middle ground with the customer,” said Ryan Steiner, corporate credit manager for Olympic Steel (Bedford Heights, OH). “If they want to go from 30-day terms to 60-day terms, we might have them meet us in the middle and may follow up by offering an early payment discount.”

Some credit professionals have found that a significant number of collection issues aren’t related to customers who don’t want to pay; they’re related to billing issues that can be identified and resolved at the onboarding stage. “A customer’s billing requirements are, whether they use a purchase order and/or a third-party payment portal, the payment terms requested and how revenue will be calculated can be addressed at the agreement review stage prior to any invoices being created,” said Ray Yarborough, CCE, CCRA, CICP, director, credit and collections at Connexity, Inc. (Santa Monica, CA).

Teaming with sales for more involvement 

Becoming a critical part of the contract review process takes time, and if the company is resistant, it can take longer. For those just starting out, it helps to start small by building a relationship with the sales team. “Don’t be afraid to ask sales if you can be included in the contract review process,” said Allison. “If not in the current one then the next one. Even if you can’t be there physically, you can ask them to give you an idea of what they’re looking at and give them some pointers on what they should be looking for.”

Once a relationship with sales is formed, credit teams can slowly begin integrating themselves into the process until they have enough experience to advocate for their involvement. “One of the first things you can do is start attending monthly meetings and talk to sales more,” said Parrish. “You can ask them to notify you when they’re considering a sale and share information with you about the potential customer. Ask them to check in with you before finalizing a contract to verify the customer and to look for any red flags. For example, a credit manager can determine if a customer has undergone a merger or acquisition simply by a minor change in a legal entity’s name.”

The bottom line: Mitigating risk is a team effort. When credit professionals take part in the contract review process, they can safeguard their company from potential loss while fostering a more inclusive and collaborative environment.