January 25, 2024

The challenges credit managers face today are not merely hurdles to overcome; they serve as catalysts for transformation. As businesses navigate unprecedented economic shifts, changing payment behavior and global uncertainties, the B2B credit industry finds itself at a pivotal crossroads. From technological advancements to the redefinition of risk assessment, these challenges are propelling the industry towards innovation and resilience, paving the way for a dynamic and adaptive future.

Challenges have morphed over time, with each era presenting its own unique set of obstacles. Past challenges often centered around traditional credit risk assessments and manual processes, which were gradually overcome through the integration of technology and data analytics. However, the challenges faced today bear distinct characteristics, marked by the rapid pace of technological advancements, interconnected global economies and an ever-shifting business environment. Tomorrow’s challenges in the credit industry are poised to be equally transformative.

By the numbers: NACM’s recent eNews poll showed 54% of credit professionals said the most challenging aspect of credit management in today’s business environment is balancing risk and opportunity, followed by technology adaptation (15%), fraud prevention (10%) and staffing (7%).

Let’s look at the top four challenges in today’s state of credit and collections along with some solutions:

1. Balancing Risk and Opportunity

Balancing risk and opportunity is an essential skill for all credit professionals to master, especially in today’s economic state. The credit manager’s role in assessing risk is a major function in keeping businesses afloat. “The debt burden that many of these companies are carrying is nothing like we’ve ever seen as credit professionals before,” said Lee Tompkins, director of credit and collections at MPW Industrial Services, Inc. (Hebron, OH). “It’s a huge challenge and requires being in concert with leadership and the sales organization to take our sales blinders off and focus on that risk which is linked to profitability.”

Monitoring both micro- and macro-economic activites is a great way to be proactive in understanding the state of financial risk of any country in which you are doing business. Consistent communication with all other functions in your company is another solution to help with balancing risk and opportunity—and being able to assess risk comes from knowledge in all aspects of the business, not strictly from a financial standpoint.

With total bankruptcy filings up 18% year-over-year in 2023, it seems to be one of the biggest challenges in balancing risk and opportunity for credit professionals dealing with customers headed into insolvency. “Bankruptcy is an unexpected challenge we’re facing this year already,” said Martine Dyer, CCE, CCRA, credit and collections manager at Restaurant Equipment Service Group (Addison, IL). “I’m starting to see bigger companies file for bankruptcy when it was never on our radar. People tend to release orders based on how big or notorious the name of a company is and it’s more of a sales-based release rather than a risk-based release. Big name corporations are not necessarily an indication of whether they are more likely to pay or not.”

It’s important to remember that the investigation of your customers is never-ending. Though you may gain an opportunity by working with a new customer, credit managers must consistently check creditworthiness of existing customers.

2. Technology Adaptation

It’s no secret that both automation and artificial intelligence functions have exponentially progressed within the last few years. Integrating new technology into your credit department tools and systems can be challenging for many reasons. An example is ensuring compliance with legal and data privacy regulations or implementation issues.

“The push to embrace new technology to make the credit department more efficient is constant,” said George Demakis, credit manager at Scafco Corporation (Spokane, WA). “We need to be smart about the process because adopting a new technology too soon or too quickly might be detrimental to the department. Picking the right vendor and not being pressured into the wrong decision or too rapidly is the most significant challenge.”

Automation helps simplify processes and offers credit managers a glimpse into the risk of a customer, but implementing any sort of new system can also be time-consuming. “We’ve addressed any potential challenges in technology by integrating credit into a larger organizational framework that deals with all aspects of the order-to-cash process,” said Andreas Schmitt, director group credit management at Rational AG (Landsberg Am Lech, Germany), “Creating a specialized team for systems and projects in credit management is how we try to keep pace with technological progress.”

3. Fraud Prevention

Credit fraud is one of the fastest growing challenges for businesses today. 2023 witnessed a rise in various forms of fraud, signaling a pressing challenge for businesses engaged in commerce. These trends have not only put credit managers on high alert but have also underscored the importance of new and robust security measures to safeguard sensitive financial information. Technological advancements in the past decade have made fraud a much easier crime to commit in the credit industry, especially through email phishing, forged digital documents, identity theft and more. U.S. companies lose 5% of their revenue to fraud each year, according to the ACFE report.

As fraudsters become more creative with their tactics, the potential for larger losses increases. “Once you have an effective fraud prevention strategy in place, it’s more about monitoring than active fraud prevention,” Demakis said. “There are several tools out there with technology that can scan reports for any attempt of cyber-related fraud.”

4. Staffing

Most businesses today continue to face staffing challenges due to their retention strategies and hiring practices—specifically with hiring qualified candidates for the job. It’s important in today’s work environment to drill down on best hiring practices and become attuned to the needs and demands of those you hire so that they can perform their duties successfully.

“COVID-19 reshaped the entire way we all think about the office and work,” said Tompkins. “Consistency of quality candidates for my team is very challenging. The pool of eligible employees to fill vacancies on my team has been lacking for about two years now. So, if you want talent, you are going to have to pay a premium for it.”

The bottom line: Challenges in the credit and collections industry will always exist, but how credit managers adapt can make an impactful difference on how to successfully overcome each one.

The causes of late payments are diverse and can negatively impact stakeholders across various industries—everything from supply chain delays, cash flow issues and invoicing errors. Credit managers must use proactive strategies to encourage timely payments from habitual and sporadic late payers.

Get to the Root Cause

Having an open conversation with your customer will not only give you better insight into their financial problems but also allow you both to work together to find a solution. It also helps you execute a plan to get them to pay you on time. Tina Hatfield, CBA, credit manager at Mountainland Supply (Orem, UT) makes sure that she has an open conversation inquiring of her customer’s circumstances and business structure in hopes of understanding internal hurdles they are navigating each month to get payments disbursed. “Most times, we identify simple ways we can assist the customer so that they can reconcile invoices and statements faster, or offer suggestions based on what we see and hear from other customers, while maintaining discretion,” she said. “Other times, there are no clear solutions, but just the conversation may be enough for the customer to be mindful of their continued delinquency and resulting consequences.”

Enforce Lien Rights

As a credit manager in the construction industry, you can enforce your lien rights, a claim made against a property by a contractor or subcontractor who has not been paid for work done on that property. Construction liens are designed to protect professionals from the risk of not being paid for services rendered. “If there's a bond that we can leverage, we’re going to execute that and we're going to impair the bond and put a claim in so that we can get paid the principal amount on the claim,” said Danny Mackes, collections manager at NACM Business Credit Services, W-WA (Burien, WA).

Marcela Rolon, CBA, credit manager at RCP Block & Brick, Inc. (Lemon Grove, CA) has a system that sends out automatic payment reminder by email. In addition, she sends a personal email to her habitual late payers as an individual reminder to remind them the due date is near. “The day before the account is late, I send another email to remind them that we have the right to send out an intent to lien on any job that is prelimed,” Rolon said. “I also remind them that we’re going to contact the owner and the general contractor if the payment isn't received.”

Make a Payment Plan

A well-designed payment plan ensures that payments are timely, reducing the risk of late fees or ongoing delinquency. Payment plans increase the chances of your recovering unpaid invoices, which means that you will get more of the payment owed to your company. “Depending on the timing, receiving payment from a week to a few weeks late is not a problem,” said Greg Foster, CBA, credit manager at Gexpro (Smyrna, GA). “If it is more than 30 days past-due, we request that they make a partial payment toward that due date or make a payment plan that is feasible for them within that timeframe. This way, we can maintain goodwill and positive relationships.”

Provide Multiple Forms of Payment

By accepting multiple forms of payment, you give customers the freedom to choose while minimizing the occurrence of late payments. This flexibility is especially helpful when working with international customers who worry about time zone differences, holidays and foreign exchange risk when making transactions. Kristine Holthaus, CBF, credit manager at SPS Companies, Inc. (Minneapolis, MN) goes a step further and allows customers to pay via credit cards over the phone. “We even offer an electronic check service so they can scan and email us the check copy and we can process it electronically,” she said. “They do not need to mail the check, and this helps save the ‘float’ time lost to the postal service. It is also more secure with all the mail fraud we are seeing in the marketplace.”

Credit Scoring

Monitoring and maintaining a good credit score is pivotal for ensuring the long-term stability and growth of a business. By letting customers know that their payment behavior will impact their credit score, they’re more likely to pay. “We let our customers know that we report our AR and payment information to Experian so if they want a good credit score, it makes sense to pay us timely,” Holthaus said. “It is very valuable to use us as a trade reference and in my department, we promptly reply to trade reference requests from our customers. This is very effective with recently formed companies that are trying to establish themselves in the industry.” Many NACM members rely on NACM National Trade Credit Report reference checking feature as a way to save staff resources.

Obtain Quality Customer Information

You can avoid late payments or payers during the customer onboarding process. There, you can look to see if barriers exist to payment in credit applications or contracts that can be easily fixed. “When you open the account, send a welcome package that outlines how to obtain invoices or other documentation necessary to pay, dispute policy and defines your payment terms with no ambiguity about what is considered late and what the consequences are for being late,” said Harry McLaughlin, CICP, process improvement manager at Continental Tire the Americas, LLC (Fort Mill, SC). “Have someone follow up on their first payments before they come due. Make certain that they receive their invoices, confirm the due dates and answer any questions. Follow up quickly on any late payments even if it is just a couple days.”

By asking for and evaluating the financials of the customer, you’ll have a better understanding of their financial state and if they have the capacity to pay you on time. “We ask for financials depending on the limit because that is a pretty good indicator of how they pay their bills,” said Jacqueline Cuggino, director of credit and risk management at Distribution Management, Inc. (Saint Charles, MO). “We also use credit reports depending on the limits being requested for payment history. We check with their bank to validate banking history and balances. For new accounts, if they go over their limit or are at 30 days and they haven’t paid their net-30 invoices, they immediately go on hold until we are current. We do not carry insurance on our customers so if there is a risk of them paying late, we will suggest they partner with one of our flooring companies and do business directly with them.”

When onboarding any customer, make sure they have a clear understanding of their terms. “All applicants, regardless of the approval level, receive a welcome letter,” Hatfield said. “This letter welcomes them as a new credit customer and includes details such as credit terms, who their credit manager is, who their salesman is, payment remit address and an invite to enroll online for access to their account.”

Maintain Customer Relationship

Building and maintaining strong customer relationships will not only ensure timely payments, but it will help you find solutions to payment delinquency. “If my customers aren’t paying me in a timely fashion, then I can’t do anything other than impress upon them that, as trade partners, we understand and will work with them as best we can,” said Foster. “But their payment history impacts our terms moving forward so we both must honor the commitments to our contract. If it’s a large customer doing large jobs, such as those in construction, there’s the ladder of supply to think about. Oftentimes, the owner and GC of a project hold onto money if they possibly can.”

Nelida Lervaag, Central Texas credit manager at Robert Madden Industries (Georgetown, TX) says communication is important to establish a strong customer relationship. “As a credit professional, you must establish a relationship with your customer and speak to them on a monthly basis,” she said. “If you keep the communication line open, you won’t be surprised when they’re in a difficult financial situation that has made them late for payments. By doing so, you’re building that trust to where they’re willing to call you about it.”

The construction industry is directly impacted by weather conditions—heavy rain, snowstorms and dangerous heat temperatures can cause issues such as improper concrete curing and foundation pouring, for example. These can lead to prolonged delays resulting in project timeline disruptions, increased costs and ultimately impact the ability for creditors to get paid. Extreme weather events are only expected to become more common, and the construction industry is faced with finding creative strategies to adapt.

Extreme weather conditions can make construction materials harder to purchase, delay material deliveries and even block off job sites. Frequent natural disasters due to climate change including wildfires, floods and the most recent countrywide winter freeze can also contribute to significant economic loss.

But even through natural disasters, credit managers must find risk management solutions. Here are a few ways to minimize risk and maximize opportunity:

Update and check your contractual language. Contract language is key for liquidated damages, said Chris Ring of NACM’s Secured Transaction Services. “Extreme weather may cause a delay in the project, so you have to check to see if your contract has some sort of contractual leeway when dealing with weather,” Ring explained. “You should also check for any contingencies built into the contract. If there aren’t any, liquidated damages should be assessed for a delay in the project being fulfilled.”

This also ties into incorporation by reference and flow down obligations. If credit managers accept a purchase order or subcontract with provisions for liquidated damages for a delay in the completion of a project but there is no concession for weather, liquidated damages can flow down to the credit department.

Sherry Raposo, corporate credit manager at VSS Emultech (West Sacramento, CA) said her company was busy with a lot of emergency work due to the Caltrans fire disaster. “We had to carefully watch our receivables for all our companies because we could have three of our companies working on the same project,” Raposo said. “We also worked with our customers who were doing emergency work and extended their terms since it takes a bit longer to be paid on emergency work.”

Monitor temperature regulations for materials. In many areas across the U.S., there have been much colder temperatures and lots of snow—and material suppliers are especially impacted by these weather circumstances. Before you ship your product out to your customer, it is imperative to keep the materials at the correct temperature for them to function properly when installed. (The fresh concrete temperature limit is maintained between 50 and 90 degrees Fahrenheit to ensure optimal curing.) If you cannot use the product due to improper care, the weight falls back to the material supplier.

Use storing to your advantage. Site storage provides the necessary space for the protection of materials and products needed to be given to construction workers. But if inclement weather causes a delay and someone needs the storage space, some issues can arise. For example, if there is a $10,000 order that cannot be shipped to the original job site but the customer wants the order shipped to a third-party warehouse. “You’ll still have to prove those materials were shipped to one location but are being installed at another location,” said Ring. “This can cause complications with being able to prove that your materials actually arrived at the jobsite—but there are written documents you can obtain to show proof.”

Choosing not to use written documents doesn't eliminate your lien rights. However, it might complicate the process of demonstrating general tasks such as painting, flooring or lumber.

The bottom line: Take precautionary measures to ensure payment because funds will only flow down based on the progression of a project. Creating an emergency action plan and customizing those plans to each individual job site is a great way to spearhead any issues. Being proactive means taking the initiative and testing your plans to minimize the maximum amount of risk.

Adhering to a corporate credit policy is essential to managing and assessing credit risk, setting payment terms and ensuring a healthy cash flow. Having a policy in place to follow establishes the guidelines to maintain financial stability and build trust with customers while minimizing the potential for bad debt. Although a credit policy is one of the most important documents in credit management, many credit departments do not have a credit policy set in place. Establishing a sound credit policy empowers the credit department to not only be an asset to the company but also play a key role in fostering long-term financial success.

Credit Policy vs Credit Procedures

A credit policy is a written document approved by top senior-level management that states the underlying framework that defines the company position on credit risk and how the extension of credit will be governed. Credit procedures are the individual steps and processes required to accomplish specific credit department tasks. Credit policy and credit procedures are used to empower the people responsible for the credit process, by providing the direction and consistency they need for successful execution.

A credit policy creates the framework for sound credit decisions. “Following credit procedures to comply with credit policy requirements and guidelines ensures we obtain enough information to make a well-informed and sound credit decision when we establish credit limits and offer open account terms to our customers,” said Brett Hanft, CBA, credit manager at American International Forest Products, LLC (Portland, OR). “A credit policy helps to ensure smart and sound credit decisions are being made, which will help ensure timely payments and consistent cash flow to your business.”

A formal written credit policy should be a constant, practical guide for conducting all processes in a credit and collection function. A policy should be reviewed and updated periodically to align with organizational objectives and changing internal and external conditions.

The purpose and benefits of a written credit policy manual include:

• To identify the credit department's mission and how it will improve the entire organization's efficiency.
• To provide guidelines for managing credit procedures.
• To ensure that everyone both internally and externally understands the responsibilities of the credit function.
• To provide a fair and consistent approach to interacting with customers and with other departments to avoid misunderstandings, miscommunications and inconsistencies.
• Decision making becomes a logical function based on pre-determined parameters.

Communicate management's parameters once credit terms and limits are set with your credit department. “The credit team should be able to consistently obtain enough credit information to determine if the business will support open account terms and a credit limit that doesn’t create unreasonable levels of risk,” Hanft said. “Document what will be required to have a complete credit file.”

A strong credit policy must have a credit department mission statement that expresses the long-range focus of the policy and defines the purpose of the credit department. It should summarize how the credit function will contribute to sales growth and profitability through risk management and customer relationships.

Components of a Credit Policy include:

• Credit department goals
• Organizational roles and responsibilities
• Terms of sale
• Credit evaluation and credit limits
• Monitoring accounts
• Reporting to management
• Budget guidelines
• Timelines and procedures for account evaluations/order approval
• Communication of credit decisions to the customer, (internal) sales, management, operations
• Guidelines for providing assistance, advice to marginal or troubled accounts
• How to address unauthorized discounts, deductions and interest charges
• Credit's role in terms of sale establishment

Updating an existing credit policy is essential to adapt to changing business environments, economic conditions and industry trends. Regular updates ensure that the policy remains effective in managing credit risk, improving decision-making processes and staying aligned with the needs of the company and its customers. “Every 12 months, we pull new credit reports and request updated bank and trades to review every active account in our portfolio,” Hanft said. “We review sales and payment experience to determine if we see any changes from the previous update: Is the existing credit limit adequate? Can we continue to support the credit limit we have in place? It’s time consuming but necessary to ensure we are not exposed for excessive risk of loss.”

Collaboration with management and other departments is crucial when updating a credit policy. Involving various stakeholders helps gather diverse perspectives and ensure alignment with business goals and objectives. Sam Bell, credit manager at Louisville Ladder Group LLC (Louisville, KY), who attended the 2023 Credit Congress session, The Time is Now to Review and Update Your Credit Policy, said his company’s finance and upper management teams helped with part of the process of revision and approval of their credit policy.

Another session attendee, Brian Newcomb, director of credit strategy and policy at AT&T Inc. (Dallas, TX), recognized the need for optimization and refinement of their credit policy, particularly considering changing industry dynamics. “We involved the finance, sales, marketing and legal teams to ensure that our revised policy aligns with the goals and objectives of each department,” Newcomb said. “They provided diverse perspectives, ultimately leading to a more robust credit policy. Regular policy reviews and updates are important since the credit industry is continually evolving, and staying proactive in adapting our credit policy has proven to be essential for our success.”

The bottom line: A well-established and regularly updated credit policy is essential for managing credit risk, ensuring consistent cash flow and fostering long-term financial success in a company.

Be sure to register for Credit Congress 2024 and attend Hanft’s session on Credit Policy Boot Camp: Creating a Credit Policy from Scratch.