December 21, 2023

Learning a new language requires patience and practice to fully grasp its nuances. It is a form of communication with words, abbreviations and symbols to relay meaning. Even simpler abbreviations such as EOD (end of day) or WFH (work from home), acronyms simplify communication and present a sense of belonging when using the terms correctly—especially in your workplace. Credit professionals across all industries have their own abbreviations or terms to use relative to their department and customers, but some terms are universal—and every credit professional should have an idea of what they mean.

As technology continues to become more prevalent in the credit industry, automation has shifted the focus to a few new abbreviations such as EDI (Electronic Data Interchange) and ERP (Enterprise Resource Planning). EDIs are the concept of exchanging business documents through a standard electric format, while ERP [systems] is a software platform that provides features such as accounts receivable, accounts payable and payroll, and other modules such as tangible and intangible assets.

Learning new phrases, abbreviations or acronyms ties back to knowing the language of credit. Just like learning any other language, you must start off with understanding basic rules involved with the message that is trying to be conveyed. However, some abbreviations can be tricky because they look the same. For example, an LC (Letter of Credit) is different than a LOC (Line of Credit). Some credit professionals use LC as an abbreviation for both terms, even though they have two different meanings.

“There are a lot of acronyms we have when it comes to financials specifically,” said Kevin Stinner, CCE, CCRA, credit manager at J.R. Simplot Company (Loveland, CO). “Basic terms like LCs or AR (accounts receivables) are things a credit professional should know right off the bat so they can properly evaluate credit. But as you are in the industry for longer, you also need to start thinking of other things that may come up in collections.”

Another common acronym you may see on a credit reference is PA (paid as agreed), especially in the banking industry. It’s an important term to know because it shows if a customer has the ability to pay the bank and potentially pay you as the creditor. In the collections side of credit, there are usually collection notes left for credit managers about customers in order to be prepared and know how to address them. PIF (paid in full) and SIF (settled in full) are two common abbreviations that come up in these notes. “SIF is a key term to pay attention to when reestablishing a line of credit to a customer,” said Stinner. “I’m more likely to do business with a customer who’s PIF than SIF because SIF implies that the account was not paid in full but rather negotiated to some type of settlement which was less than the full amount.”

Beyond acronyms alone, there are a couple of common phrases or expressions credit professionals have heard or refer to. Scott Chase, CCE, CICP, global director of credit at Gibson Brands, Inc. (Nashville, TN) said he likes to refer to the saying, “You can’t squeeze blood from a turnip.” In the context of credit, it means you can’t get payment for a bill from someone who doesn’t have the capacity to pay. “The whole credit industry has become very acronym-oriented whether it’s BPDSO (best possible days sales outstanding), CIA (cash in advance) or COD (cash on delivery),” Chase said. “I tend to look at this as being more of a sensitive issue when we’re talking about terms of sale, but as we look at things generationally, some terms are no longer as valid and it’s comparative to the changes in the world and how we’ve done credit over the last several years.”

Some terms may not translate when talking to your sales team. Certain phrases, statements or acronyms in credit may mean something completely different to them. “The phrase that I have always liked is when a salesperson says a customer has never not paid us,” said Stinner. “And while that may be true, they never have paid either. That’s code to a credit manager that the customer never will pay us.”

Though most terms and acronyms in credit are related to their description or relation to customers, some credit professionals think understanding acronyms in credit for designations are just as important to be knowledgeable about in the industry. “If I’m hiring a credit person, it’s important for me to know that they know what a CCE (Certified Credit Executive) is,” said Kenny Wine, CCE, director of credit at Joseph T Ryerson & Son, Inc. (Little Rock, AR). “As a credit professional, someone new to the industry could miss an opportunity by not knowing what that designation holds and entails because it all ties back to credit.”

Every industry has their own language and way to communicate amongst each other—and knowing what that language means shows your understanding of what you do in your industry. “If you’re just new to the industry, you’re going to have to do some form of collections being in credit, so you must know the universal collection note acronyms,” said Stinner. “It’s our own little language we all understand and speak.”

Credit management is a risky business. Every credit decision is directly influenced by ever-changing micro- and macro-economic factors. To better mitigate risk, credit professionals must be proactive in their credit limit assessments for new and existing customers. According to a recent eNews poll, most credit professionals review existing customer credit limits on an annual basis (64%), while some reassess credit limits as frequently as every six months (23%). Others reassess credit limits less often, such as 18 months (4%) or 24 months (10%) at a time. The frequency of reviewing credit limits can be due to one or a combination of factors.

Changes in Customer Payment Behavior

Changes in customer activity determine how often you reassess credit limits as it can impact their ability to pay you in the long term. If a customer starts to slow down their payments or asks for a credit limit increase, then you might want to increase the frequency of credit limit reassessments. Tim Cain, CBA, director of global credit and collections at Keen, Inc. (Portland, OR) conducts semi-annual credit reviews, but as new information comes in, he'll do some on-the-spot credit reviews or demand reviews that could lead to either a credit line increase or decrease. “For partners who want to take on additional orders because business is booming, we want to make sure that they can handle it,” he said.

But if a customer pays you on time and rarely asks for an increase in credit limit, you’ll reassess credit limits less often. Jeff Cozad, CCP, CPC, business manager at Patz Corporation (Pound, WI) reviews credit limits of existing customers every 24 months unless there is something that triggers him to view the account. “If I have an account where they're going over their credit limit, having payment issues or delinquencies and when there's been a change in the business or ownership, that will prompt a review sooner,” he said.

Your Risk Tolerance

Understanding your company’s risk capacity and risk tolerance is also key when determining how often to revisit credit lines. “We rely heavily on our credit reporting tools with the risk tolerance,” said Nate Hutton, CICP, global credit manager at Donaldson Company, Inc. (Minneapolis, MN). “Fortunately, our portfolio of customers tends to be less risky so we typically can accommodate all customer credit limit requests accordingly.”

Risk tolerance is subjective, while risk capacity is objective. Risk tolerance refers to an organization's willingness to accept a certain level of risk based on their comfort level. For example, a well-established company with high margins in a market with growth may have a high-risk tolerance and be willing to sell to high-risk customers. A company with low margins in a highly competitive market may have a lower tolerance for risk and will sell only to financially strong customers.

Risk capacity represents the maximum amount of risk that can be tolerated without causing significant negative consequences. An undercapitalized company may not have sufficient reserves to survive a large loss. Therefore, it has low-risk capacity.

“We are anticipating more risk based on what we’ve seen in the last few years,” said Barry Hickman, senior director of credit at Dal-Tile Corporation (Dallas, TX), who reviews customer’s credit limits every six months. “We’re tightening up practices and credit lines to better secure our debt and properties since we're in the construction supply chain industry,” he said. “At the end of a project, there's not a lot of money left either with the owner or with the general contractor, so you have to be very quick in filing more lien notices and bond claims. We have some tools that allow us to create project accounts for large commercial projects to keep an eye on a customer's account and abide by their rights in various states.”

Customer Risk Rating

Risk rating involves the categorization of individual loans, based on credit analysis and local market conditions, into a series of graduated categories of increasing risk. By figuring out your customer’s risk rating, you can decide how often you reassess or readjust their credit line. Scott Dunlap, director of credit and collections at Coleman Oil Co. (Lewiston, ID) assesses credit limits on an annual basis but ultimately relies on the risk rating of the customer to determine the frequency of credit line reassessments. “I compute a weighted score, where a lower score corresponds to a higher risk level, and conversely, a higher score indicates a lower risk level. A high-risk account may get reviewed every six months whereas a low-risk account may be reviewed 18 months or more.”

The amount of credit granted to a customer determines how often you reassess credit limits as well. “We do an annual review of every customer as long as we've already provided them a minimal amount of credit and if they're below that threshold, we do a periodic check of smaller sources and just live with that risk at that time,” said Marc Greenberg, CCRA, credit supervisor at Mansfield Service Partners South, LLC (Gainesville, GA). “We try to maximize the amount of credit whenever possible as it provides a better customer experience and increases the customer's ability to pay us.”

Sales Revenue of Customer

Sales directly impact the timing of credit limit reassessment. When a customer generates lower sales, they tend to pay more slowly, prompting credit managers to monitor their account more frequently. Sherry Bushman, director of credit and collections at Partners Personnel (Santa Barbara, CA) reviews credit limits for new clients based on weekly sales volumes. “We review every six months to ensure that we take in consideration customers who are seasonal and have multiple billing methods and to capture the average sales to accommodate the credit limit,” she said. “However, we review the following criteria: 1) If the client is exceeding the credit limit, 2) What is the average payment history and 3) Are they below D&B maximum credit limit?”

State of the Economy

Inflationary pressures as well as increases in input costs and manufacturing costs create cash flow issues for customers. This, in turn, causes more accounts to increase their credit limit above what they have previously established. “Over the last few years, we have needed to monitor changes in activity on the account more frequently, such as their credit usage,” Cozad said. “For example, customers used to pay you in 20 days and now they're paying you in 30 or 35 days. If I notice those changes, then I'm going to do a credit review and see if I can get more information about what's going on and if there’s potential risk of non-payment for us.”

As businesses navigate through dynamic economic landscapes, the significance of credit managers as strategic leaders cannot be overstated. Their role extends far beyond managing credit; they are the guardians of financial stability, charting courses through uncertainties and steering organizations toward sustainable growth.

NACM’s annual Credit Congress & Exposition brings credit professionals together from far and wide for networking and informative educational sessions. Next year’s 128^th Credit Congress will be in Las Vegas, NV from June 9-12 with new opportunities to learn. NACM will be offering a NEW Executive Leadership Workshop hosted by Dr. Jeremy Graves, which provides the necessary tools credit leaders need to navigate change successfully.  

As someone who has worked with organizations, teams and leaders for nearly 25 years, Dr. Graves said a few main points he wants to focus on are how to grow and develop as a leader, as well as some of the greatest leadership attributes. “Looking at it from a personal point of view, where do you want to grow? How can you develop as a leader to your team and how can you better your organization?” Graves explained. “When I think about leadership, I focus specifically on servant leadership because I feel like it is the model that encompasses all types of leaders. When we show up, we have lots of different ways we engage with our teams, organizations and ourselves as leaders. We must do a deeper dive in knowing ourselves, choosing ourselves and giving ourselves.”

Additional and tailored education opportunities for high-level credit managers are essential because learning never stops in your career. As the world continues to change, operations and processes follow suit. “These types of workshops allow credit managers to challenge themselves to become more efficient at their job,” said Donni Gabbert, office and accounting manager at Kilgore TEC Products, Inc. (Spokane, WA). “It is always better to go upstream to understand the reasoning behind the decision-making process. The employer counts on credit managers to help run the business with effectiveness.”

The Executive Leadership Workshop will also focus on how leaders take that information about their own leadership styles and allow it to influence how they build and work with teams. Wanting to be the change within your organization starts with strong leadership and building the skillset you need to be successful in doing so.

Credit professionals who took last year’s Strategic Leadership Track got to experience personal insight from other high-level credit managers and expand on conversations outside of the conference. But this year, credit leaders are excited to learn even more about how to develop their own leadership style. Sheryl Rasmusson, CCE, president of Kilgore TEC Products Inc. (Spokane, WA) said she is most excited to learn about effective leadership in an ever-changing work and business environment. “With the challenges our industry is currently facing including labor shortages, timely material procurement, construction schedule changes the financial impacts of late payments are all difficult to handle,” Rasmusson said. “It’ll be great to learn how we successfully navigate all of this, while also growing the business through thoughtful, strategic, progressive thinking.”

Gabbert, who just recently moved into a leadership position, is excited to learn more about the practical side of being a leader. “My goal is to be a team leader and build my accounting team to be the best they can be,” she said. “I’m excited to learn all I can in this workshop.”

For more information about Credit Congress, be sure to visit our website. Those attending all segments of the Executive Leadership Workshop will receive a certificate of attendance upon completion. Space is limited to the first 50 registrants.

Due to supply chain challenges, more companies are seeking alternative suppliers, resulting in an increase in new customer credit applications. But even a well-established business that has been buying from other suppliers needs the same degree of risk assessment as a new company. How they abide by terms and pay other suppliers could be an indication of how well they will pay your company.

Credit applications are the first line of defense against risk. Risk mitigation starts the moment you receive a credit application from a customer, whether online or in a hard copy. Are there any red flags? Does the customer information make sense and is it consistent? Is this customer creditworthy? Building a solid credit application sounds simple enough, but not asking and subsequently confirming critical information can make the application close to worthless.

Prioritize KYC Practices

Know Your Customer (KYC) is a standard when assessing creditworthiness. It is the basic purpose of a credit application and helps the credit manager gather detailed financial information so they can make an informed credit decision. The more pertinent information you can gather ahead of time, the easier your review will be, said Jordan Peloquin, credit manager at Ozinga Bros., Inc. (Mokena, IL). “Customer supplied credit references, in addition to credit references you find, help you see how well-established the customer is.”

First and foremost, the credit application should fully and accurately identify the customer; the full name and legal identity of who is responsible for payment. The name on the credit application should match exactly the name on the purchase orders and on the invoices. This is not only relevant for enforcing collections, but also necessary to comply with Know Your Customer (KYC) for Restricted Party and Anti-Money Laundering laws.

To properly identify the customer, information required on the credit application should include the applicant’s full name, address, type of entity, contact information, tax ID number, disclosed bank and trade information. You should triple check to verify that the customer information is correct and consistent throughout the application and that name is incorporated in any guarantee. “What many consider ‘excess language’ is there for a reason,” said Emory Potter, partner at Hays & Potter, LLP (Peachtree Corners, GA).

When it comes to online credit applications, the customer-provided information isn’t always accurate or adequately input. “People may not understand what they are entering, so it may be just an off-the-wall deal that can work against them,” said Matthew Jameson, attorney at Jameson and Dunagan, P.C. (Dallas, TX). “But getting customer information through one-on-one conversations, preferably with an attorney, can help mitigate that risk.” As with any credit application, online or hard copy, it is the responsibility of the credit professional to confirm all information.

Establishing Terms & Conditions

The purpose of having a signed credit application is to protect your company’s interests. “Make sure your credit application has adequate verbiage to ensure your interests take priority over any notations on a customer purchase order to cover all purchases on open account terms with your company,” said Brett Hanft, CBA, credit manager at American International Forest Products, LLC (Portland, OR).

When discussing collections with your customer, refer to the credit application, advise them of the terms they agreed to and that you expect them to live up to the agreement, said Peloquin, who uses the credit application as a contract to collect payment. “When an account gets elevated to a collection company or our legal team, the credit application provides a basis for the ‘breach of contract.’”

The terms and conditions on the credit application should include an interest provision—the creditor’s right to collect finance or interest charges if a customer fails to pay on time. Quite often, credit applications are completed by someone in procurement or accounts payable who does not have authority to bind the company to payment of any interest or collections costs that may be incurred. To improve the chance of enforcing such a clause, it should be acknowledged separately on the credit application with a separate signature or initial.

The credit application should be signed by an individual authorized to obligate the company. If uncertain as to the authority of the signatory, ask for a corporate resolution or other document that validates the signature. Peloquin's credit application has verbiage that allows his company the right to collect finance charges and legal fees incurred.

“In most states, you’re going to need a written contract in order to charge a maximum rate,” Jameson said. “The problem with that is if you don’t have a written contract, you could have a usury violation, which is the charge of an unlawful interest rate which there is a severe penalty for.”

A personal guarantee ultimately determines whether a creditor gets paid and must be tailored to the business. “It’s very easy and inexpensive to set up an LLC or any type of entity without the help of a lawyer,” Jameson said. “But you have to include a personal guarantee because if the debtor doesn’t pay, the personal guarantee will allow you to sue an individual for the debt owed or credit granted.”

Beware of the Battle of the Forms

A company would have to evaluate the importance of what clauses would be skipped by having a credit application serve as their legal contract with a customer, said JoAnn Malz, CCE, ICCE, NACM chair elect and director of credit and collections at The Imagine Group LLC (Jordan, MN). “If they use the credit application as a binding contract, then key clauses should be in the credit application with a notation that the credit application takes precedence over all POs.”

Creditors must be cautious when accepting purchase orders, Peloquin said. “In most cases, a customer's written purchase order will state that their document supersedes prior agreements, which includes the terms and conditions.” This can be prevented by amending a purchase order issued by the customer or having them sign the order acknowledgement that reinforces the terms and conditions.

But changing terms and conditions after they’ve been set only leads to trouble for the creditor, breaking consistency and leaving room for error.

An area of conflict between the customer purchase order and the credit application is the identification of the legal venue. “In some states, you can designate a venue for when to file suit in the venues provision, which can work in your favor,” Jameson said. To ensure those provisions, such as exclusive jurisdictions, are valid, the application must have a signature block where the customer agrees to all of the terms and conditions and certifies that all information is correct.

You don’t need to revise your credit application every few years, said Jameson. “Creditor legal principles will not be much different twenty years from now but if you have a strong credit application tailored for your company, it can last you a very long time.”