The power of precise documentation in risk management

Certain credit practices are grounded in the roots of the profession, unchanging in a dynamic field where change is constant. Documentation is one of these habits, with thorough records of even the simplest day-to-day credit decisions protecting credit departments from risk down the line.  

Why it matters: Proper documentation is vital in credit management. With customer information and terms changing at a moment’s notice, it is important to have a high standard of documentation within your credit department to ensure that there is a clear record of the decisions made each day.   

Keeping detailed records is a daily task, not an afterthought. When establishing a relationship with a new customer, take the time to document the agreements reached with that customer, thinking beyond just terms and creating a record of all the circumstances of your continued business relationship.  

“Proper documentation is broad, starting with documenting the framework for the relationship that we’re going to have with the customer as far as terms, how they want shipping handled and how they’re going to handle disputes, rejections or returns,” said JoAnn Malz, CCE, ICCE, director of credit and collections for The Imagine Group (Shakopee, MN). “If those basic things about the relationship aren’t documented, it can cause problems down the road.”  

Proper documentation is valuable should a disagreement escalate into a lawsuit. Clear and organized records of conversations with customers and any alterations made to terms or order details can help communicate the case to your attorney. By maintaining organized records, you can save your attorney time by not burdening them with making sense of a mounting pile of unorganized paperwork, effectively helping you save on attorney’s fees.  

“The better organized your records are, the better you can tell your story and the more likely the judge is going to be on your side,” said Brian J. Jackiw, Esq., partner at Tucker Ellis LLP (Chicago, IL). “It also applies to your legal documentation. If your credit application is put together very tightly, that is going to make it easier for judges to see they have no option but to rule in your favor because your customer agreed to the terms.”  

Documentation is not limited to your formal applications and agreements but includes communication between you and your customer. “I remember a deposition when a client was recalling a situation under oath and we had emails drafted by that individual that were directly conflicting with their deposition statements,” said Ty Knox, ICCE, director of credit and risk at EFCO Corp. (Des Moines, IA). “We were able to use those messages when it was our turn to question the witness, and it didn’t bode well for them.”  

Comprehensive documentation means having records of communication within your company and with your customer, including meeting notes, old emails and voicemails. If an important conversation happens over the phone, take the time to follow up with your customer with a short email confirming the points you discussed and any agreements reached, in case that phone call is ever brought into question.   

Thorough documentation can also protect your department from accusations of Equal Credit Opportunity Act (ECOA) or antitrust violations. Creating internal policies requiring documentation can help safeguard your company from allegations should they arise.  

“On our credit application, we have the clause in for ECOA so that our new customers know what their rights are if they are ever denied credit,” Malz said. “Any non-standard term requires formal approval and all of those are documented, so we have them saved and retained. We also make a note in the customer’s overall general credit notes.”  

The bottom line: Credit policies will best protect credit managers from risk when they carve out clear standards of documentation. Having a precedent for what needs to be recorded and keeping that information organized is critical to maintaining healthy relationships with your customers and navigating disputes or litigation should they occur.