How credit holds impact a customer relationship

Credit holds temporarily suspend or reduce credit limits for customers who miss payments or exceed their credit limit.

Why it matters: Although often used as a last resort, implementing credit holds is necessary as it aids in mitigating risk, ensuring financial stability and maintaining positive customer relationships.

Credit hold criteria and management vary by industry and company. For instance, Chelsea Hirn, director of credit operations at KGP Companies (Faribault, MN), has an internal automated system that places accounts on hold if customers exceed their credit limit or are past due, without direct notification to the customer.

“We’re able to look at each account, being mindful of any deadlines or anything that might affect the customer,” Hirn said. “But we also reanalyze and assess risk and then release them as warranted. For each of the accounts that go on hold, there is a sales rep to review it.”

Because of her automated system, Hirn can inform the customer before they have to place the account on hold. “If they can’t get their account current in this specific period of time, we would either grant a higher credit limit or get certain assurances or get a payment in advance to decrease the credit or prepaid on that particular order.”

Jon Hanson, CCE, CCRA, VP, director of corporate credit at OVOL USA (Carrollton, TX), uses a trigger point system that may cause customers to go on credit hold such as:

• The order exceeds the credit line.
• The customer is past due.
• The customer is inactive.

The customer service team then tells the credit team which accounts need to be put on hold. But before any action is taken, the credit department carefully reviews the accounts and talks to the sales team in case they have more information.

“If a customer hasn’t bought from us in over six months, even though the order may be under the credit line, it’s going to make us look at it,” Hanson said. “We may conduct a background check, update the file or reach out to NACM for trade credit reports. But quite frankly, we see credit holds as an opportunity to communicate and get to know our customer.”

Some credit professionals use an exception-based credit order review system. Here’s an example of parameters for exception-based holds:

• Credit limit: If an order causes a customer to exceed their credit limit, the order will be placed on hold until a credit manager can review and release it. The credit manager will either make an exception (project-related, temporary circumstances, dispute or claim) or increase the customer’s limit after a review.
• Past-due balance: A balance that was over 30 days past due would go to the credit manager for review. The credit manager would release the order based on account status and communication with the customer.

These parameters can be changed by the credit manager at any time if within their delegation of authority. Some credit managers have key customers exempt from any order restrictions.

Yes, but: If not properly managed, credit holds can strain or even jeopardize customer relationships, which is why it is vital that credit professionals navigate credit holds with caution.

“It’s all about managing risk and maintaining the balance between meeting sales targets and promoting a clean A/R,” said Asha Weekes, ICCE, senior manager, credit at Gildan (Christ Church, Barbados). “Having good internal and external relations will facilitate this. It involves the customer, sales, customer service and the credit/AR collections teams.”

Weekes’ enterprise resource planning (ERP) system automatically places orders on hold when the customer is over their credit limit. It sends a message to the customer service team, who in turn reach out to the credit team to review and advise.

This hold, however, is not communicated to the customer unless it is required. “It may be a case of funds being received but not yet booked to their account,” Weekes said. “However, should we need to reach out, it would be a friendly reminder from the credit team that they have extended their limit, and an order is pending. Afterwards, we discuss the next steps. But it’s important to note that we also have a few low-risk customers exempt from the automatic hold.”

Tips for better customer relations:

• Make sure credit limits are up-to-date and realistic.

• Ensure your customer service team or online ordering system uses clear language. An order review differs from a credit hold, and your ERP should reflect this.
• Make sure that any disputed past-due A/R is coded so that it does not cause any credit holds due to the automated exception.
• Make sure that the customer is notified promptly if their account is on hold. Holding customer orders to get their attention without any prior notice is not good practice.
• Notify sales immediately if a customer is placed on hold. It is important to ensure they are informed and not caught off guard.
• Don’t discuss credit issues with buyers or order placers if you’re in customer service.

The bottom line: Implementing credit holds is important for mitigating risk and maintaining financial stability, but it requires careful management.