April 20, 2023

Approving a credit application is one of the first steps to securing new business. The more efficient your department is at processing credit applications, the more time your team can spend focusing on other value-added tasks. A recent eNews poll revealed the average time it takes for a credit department to process a domestic credit application is two and a half days. But some credit professionals reported the ability to process applications in little as two hours or it taking as long as two weeks. So, why the large gap?

Sid Malladi, CEO and founder of Nuvo Technologies says application processing time is influenced by three important factors:

1. Whether your process is manual or automated.
2. How many available staff members can focus on credit application processing.
3. The ability to capture needed data to make a credit decision.

“It is in the best interest of the customer, the credit department and the company to have an efficient application approval process in place,” he said. “This puts credit at the forefront of better customer service and enables credit to facilitate revenue.”

The transition from manual to digital credit applications can help decrease processing time. But more than half of credit professionals say only 25% or less of credit applications they receive are online, while 18% have fully digitized the credit application process and no longer accept paper, according to an eNews poll.

“That's a testament to the speed, accuracy and clever technology involved with a digital credit application versus a PDF application,” said Alex Armitage, CEO and founder at Nectarine Credit. Automation also can help catch credit risk. “If your digital credit application platform flagged an application for high risk, of course, your company wants a sale, but the risk may outweigh the reward in this case.”

However, automation cannot solve an organizational problem. “Credit departments must have a standardized approach to take the credit application from submission to approval in a quick and efficient manner,” Malladi said. “An ad hoc policy is a common evil for delayed credit application processing. A written policy is ideal or at least a shared understanding about risk tolerance and the degree of customer information needed to process an approval.”

In a fast-paced business world, customers are looking to get credit approval as quickly as possible—and the credit department is under pressure to make a fast decision to secure the sale and unlock revenue, while also ensuring the customer can pay.

“When applications need to be rushed, we typically pull the credit report and see if we’re able to approve based on the given information while waiting on the rest of the references,” said Kristin Caswell, CBF, CICP, director of credit at Dakota Supply Group (Plymouth, MN). “We’ll communicate with the customer and sales team to see if there are any smaller orders they need right away, but we don’t need to get the full approval done before we can process the urgent order.”

Each piece of information is crucial to understand the full risk of selling to a certain customer. But some information takes longer to obtain than others. “It varies widely depending on how long it takes for us to hear back from references,” Caswell said. “We try to get the application done in five business days, and that often includes pulling supplemental credit reports if we’re not hearing back from the references.”

In some cases, you may want to choose the most important pieces of information in order shorten the turnaround time. “For special circumstances, I have been able to establish accounts the same day with rapid responses from the trade references, so the risk is much lower,” said Chris Roshong, credit manager at Graves Lumber Company (Copley, OH).

Setting expectations with new customers on the front end can help streamline the credit approval process. “Customers and the credit department should have a shared understanding about what is needed,” Malladi said. And perfecting the process is all about a balance between speed and accuracy. “For example, you might need certain data points to approve a $30k credit limit but need additional information to approve a higher limit,” he added.

Microsoft’s Excel has long reigned as the main data organizer in business. But since the launch of Microsoft’s Power BI in 2014, data organization has evolved. Power BI is an interactive data visualization platform software product for self-service and enterprise business intelligence (BI). With it, you can connect to and visualize any data, and infuse the visuals into any application. While both programs are efficient, credit professionals should be aware of their differences and how to use each in order to organize their data.

Excel has been a staple for many credit professionals due to its efficiency and simplicity. “If used correctly, it can save time and effort,” said Yazmin Yepez, CBF, CCRA, CICP, credit supervisor at Mitsubishi Electric Automation, Inc. (Vernon Hills, IL), who uses it to prepare for her month-end report. “I have saved formulas that are linked to graphs and pie charts, making it easier for executives to understand the condition of the receivables.” She also uses Excel for KPIs such as DSO, cash collected as % of beginning A/R, delinquency and DBT.

Excel Pros

• User-friendly for individuals and corporations
• Functions and formulas for financial calculations and analysis
• You can create charts, graphs and pivot tables for data visualization
• It can handle moderate-sized data sets

Excel Cons

• Limited capacity for interactive dashboards and real-time data analysis
• Manual input and updating of data
• Difficult to maintain single source of truth principle
• Limited capability for complex data modeling and analysis
• Prone to errors if data is not properly entered or incorrect formulas are applied

One of the drawbacks for credit professionals is the space limit in Excel, “which is difficult considering that in the credit industry, the data isn’t always clean and takes up a lot of space,” said Leon Zhang, credit operations manager at SRS Distribution Inc. (McKinney, TX). He finds it easier to transfer his data from a CSV file or Excel file to Power BI. “Not to say Excel doesn’t have its positives. It’s easy to pick up and gets the basics done without having to go too deeply.”

Power BI has increased in popularity with its capacity to handle larger data sets, a must in the credit profession. “Now with the dashboard, we look at everything past due and the summary level on all accounts,” said Lee Tompkins, RGCP, director of credit and collections at MPW Industrial Services, Inc. (Hebron, OH). He finds it especially helpful with weekly AR calls. “In the past, we downloaded reports from JD Edwards into Excel and the team would have to type comments in. It was time consuming. Power BI is more of a deep-dive and can be sorted by account, sales, region, business unit and cost.”

Power BI Pros

• Advanced data modeling and transformation capabilities
• Can handle large and diverse data sets
• Natural language querying and predictive analytics
• Interactive dashboards and real-time data analysis
• Connect to multiple data sources, including internet data and cloud-based data services

Power BI combines multiple data sets and creates a visual for the user to view and understand what they need, Zhang said. This way, users don’t have to sort through multiple reports to pull out what they need. “We’re able to create a standard for what we consider a good level to be at, whether that be for our customers or credit managers.”

Power BI Cons

• Requires advanced training
• Requires a stable and reliable internet connection
• Can be costly for smaller businesses
• Limited capability for financial analysis and calculation functions

When it comes to training employees in Power BI, Excel is much easier to learn. “Excel is more user-friendly whereas there’s multiple canvases and stats you have to learn in Power BI,” Zhang said. “If you need to look at a quick table or a quick draft, Excel is the way to go.”

When to Use Power BI Over Excel

• Large or complex data sets: Power BI can connect multiple data to form relationships. Those visuals can then be used by other users.
• Advanced data visualization
• Predictive analytics
• Real-time data analysis
• Collaborative data analysis

When to Use Excel Over Power BI

• Quick calculations
• Small data analyzation
• Simple data visualization
• Ad-hoc analyses
• For individual or small team use

The goal of the credit department is to facilitate as many sales as possible, as safely as possible, which means credit professionals must make some difficult decisions. Denying credit is typically a last resort—but sometimes it is necessary. Typical reasons for denying an applicant an open credit line include showing up on Bureau of Industry and Security lists, refusal to sign terms and conditions of a sale and insufficient customer information.

However, denying credit for discriminatory reasons is illegal, and there are steps credit professionals must take when notifying an applicant.

Don’t Close Any Doors

Kenny Wine, CCE, director of credit-South/East, Joseph T Ryerson & Son, Inc. (Little Rock, AR) says his department denies credit less than 5% of the time. “You want to try to find a reason to extend terms through reporting agencies, trade payments, financials, personal and cross-corporate guarantees.” These help you assess the creditworthiness of the customer and decide if you want to deny credit or not.

“We usually deny the amount of credit they want,” Wine said. If they want a $100,000 credit line, offer them $10,000 instead. “We give them the option to pay one third of it now then the rest after. We give them options to pay with a credit card or put part of it down.”

In a competitive market, asking for terms outside of an open line of credit is a challenge if you want to stay competitive, but an open line of credit leaves creditors without much control and is never a good idea when dealing with customers who will not pay. Instead, try offering cash terms so your company does not lose out on a sale.

Don’t Destroy Relationships

Congress wrote the Equal Credit Opportunity Act (ECOA) broadly, and Regulation B of the ECOA interprets it in even more expansive terms. Creditors must be aware of the breadth of this definition and understand that potential applicants, as well as formal applicants, fall under the provision of the Act. The statute and Regulation B define the term “credit transaction” to encompass all aspects of a prospective applicant’s dealings with a potential creditor. Requests and requirements for information, the investigation procedures used by a creditor, a creditor’s standards of creditworthiness and terms of credit all fall under the term “credit transaction.” Additionally, it is important for creditors to remember that indirect applications for credit also fall within the purview of the Act.

Make sure to keep all financial information confidential, such as trade references or credit ratings. If not, you run the risk of violating the ECOA and possibly face litigation. Instead, use broad language like, you did not meet our minimum standards at this time or there is insufficient information to make a decision. This manner informs the customer as to why they were denied and leaves room for future business.

The following language is required and can be placed in the footer of a credit application:

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income devices from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The federal agency that administers compliance with this law concerning this creditor is the Federal Trade Commission, Division of Credit Practices, 6th Street and Pennsylvania Avenue, NW, Washington, DC 20580.

Do Uphold Credit Standards

It is your job as a credit professional to mitigate risk and protect the margins of the company while finding ways to keep sales moving—and sometimes that means making a collateral decision, said JoAnn Malz, CCE, ICCE, NACM Chair elect and director of credit and collections at The Imagine Group LLC (Jordan, MN). “There’re also situations where customers themselves may say, I don’t want a credit limit.” In this case, ask for cash in advance or a credit card payment.

Credit professionals may deny credit in cases of serious past-dues. “For them, we may remove their credit limit until they get caught up,” Malz said. “We also remove the credit limit if there’s litigation or we turn them over for collections. If we’ve written off any balances to bad debt, then their credit limit is removed.”

One clear sign of credit risk is insolvency, typically found in the customer’s financials. “You’d deny credit if they're in bankruptcy, insolvent or if you figure out that they or other people in their industry don’t pay you well,” Wine said. “If their financials aren’t great, you wouldn’t extend credit unless you knew that you can get paid in 30 days, but then you run the risk of a preference filing.”

Negative credit reports show that the customer is less likely to pay on time if at all. “I deny credit with reports of slow pay or collections or no revolving line of credit,” said Kim Hanlin, credit manager at Kloeckner Metals Corporation (Dallas, TX), who denies one in 10 credit applications. “If they are cash poor with NSF checks or have major tax liens, that’s a red flag.”

Do Consider External Factors

External risk factors like the industry type or economy can make extending credit undesirable. You’d provide shorter payment terms for a customer in the food industry than one in construction. Sanctions, especially now, prevent creditors from working with specified customers. “Beyond the credit review, you really have to understand the economy and what’s going on in the world to extend credit,” Malz said.

Sometimes it’s a gut feeling that prompts you to deny credit. “If I suspect potential fraud, never heard of their references or their email addresses seem odd, I deny credit,” Hanlin said. A customer pushing to get a quick approval is also an indicator of fraud. “Most customers who have terrible credit don’t even apply for open terms.”

The pandemic also changed the reasons an applicant may be denied open terms. Credit professionals are now more concerned with long-term financial risk as opposed to short-term risk. Not only should you be concerned if a customer can pay you tomorrow, but can that same customer pay in a year from now?

Manufacturers continue to struggle with completing projects on time due to the tightening of supplies such as cement—the second-most widely used material in the world after water. The aftermath of supply chain issues has caused inflation and shortages in not only retail-focused industries, but machinery and non-residential construction as well.

Shortages cause delays in project completion—and delays in project completion affect the timeliness of payments. “It’s a trickled down, domino effect,” said Chris Ring of NACM’s Secured Transaction Services. “Cement is one of the first elements that goes into any kind of construction project, whether residential or commercial. With a shortage of any materials, the project will automatically run behind schedule.”

Construction loans and commercial jobs are typically geared through deadlines created by banks who need projects built in a certain timeframe. The obligation of new projects needs to be fulfilled in order to generate income. “Until a project is finished it doesn’t generate revenue and many contractors feel the pressure from banks to get the project done,” said Ring. “A lot of owners and general contractors don’t want to take the blame based on the amount of money they may or may not make from a project, so they’ll pass it down to subcontractors and suppliers of materials to back charge profitability.”

Coupling the shortages of products, cement prices are up 15% year-over-year, along with prestressed concrete products at their highest spike of 32.1%. “Building contractors who hoped they’d seen the back of input-cost inflation—steel and timber prices have fallen a lot lately—must instead endure another year of rising cement prices, or face going without,” reads an article from The Washington Post.

Market contraction is expected this year after high demand in the winter as companies struggled to build sufficient inventories, Ed Sullivan, chief economist at the Portland Cement Association told ENR. Sullivan estimates the cement market to pull back by 3.5% in the second half of this year, being first decline in 14 years.

“The problem with inflation on top of the shortage is that a general contract could be signed 6-12 months before the customer breaks ground,” said Ring. “The contracts are signed with the assumption of certain materials costing a specific price—and if there’s no way to edit the contract from a pricing standpoint, it can be very problematic for the general contractor.”

The global shortage of cement could cause a slowdown in federally-funded infrastructures. “Decreased demand may free up some inventories, and we fully expect imports will be at a very strong rate next year,” Sullivan said. “In terms of that dynamic, there’s a greater likelihood that if this market tightness doesn’t disappear, it will at least lessen.”