Credit Management fundamental element in the financial management of companies: an effective process can determine the success or failure of an organization. Offering payment extensions to clients is, in fact, one of the competitive advantages that often prove decisive for the performance of the company, especially in foreign markets.

To protect the company's assets, however, it is necessary that the credit risk is mitigated appropriately: it is therefore fundamental to create a Credit Policy, a decision-making system that defines the rules for managing trade credit. In this article, we will analyze in-depth a case study that shows how the optimization of internal processes and the implementation of credit insurance have facilitated one of our client companies in effectively managing their business, minimizing losses.

The Case Study

The company, operating in the Food Sector with a turnover of 50 million Saudi riyals, had suffered significant losses in the past due to some insolvencies. One of the most critical cases involved the granting of a 500,000 SAR credit to a saudi customer, who was then unable to honor the payment, causing a loss of 350,000 SAR for the company. This particular event made it evident the need to review and improve the internal Credit Management process, to prevent the recurrence of similar events.

The arrival of a new Credit Manager brings with it two significant changes: firstly, the revision of the internal structure, through the creation of a Credit Policy and a Credit management process, secondly the adoption of one of the possible tools to cover the risk of insolvency: Trade Credit Insurance.

The credit management process in this case involves the creation of "Credit Committees", dedicated to screening and evaluating new customers with the purpose of assessing credit requests, and monitoring the progress of credits already granted, with well-defined roles and authorization levels.

This approach allows for a climate of greater collaboration and information sharing among the different teams involved, improving efficiency in credit risk assessment and in managing non-payments, ensuring an appropriate balance between business objectives and risk reduction and prevention.

At the same time, the company decides to activate a Trade Credit Insurance policy, which by definition protects against the risk associated with the possible insolvency of the customer, offering the company an additional level of financial protection.

Credit insurance covers against the risk of non-payment, with three main advantages:

  • Access to a complete range of updated information on the evolution of credit risk of their customer portfolio
  • Transfer credit risk to the insurance company, receiving indemnification in the event of non-payment
  • Improve their position towards not only customers (being able to offer payment terms) but also banks
  • Thanks to these two changes, the company has been able to avoid further losses and significantly improve credit management, benefiting 360° business management.

Lessons learned and strategies for optimizing Credit Management

The case study highlights the fundamental steps that companies can take to improve their Credit Management:

  1. Draft a credit policy that serves as a reference point for all involved functions and provides for well-defined roles and authorization levels, with their respective "thresholds" for granting credit autonomously: this can be based on a detailed definition of the type of client company, based on specific criteria such as turnover or number of employees. In the case of the company analyzed, a scoring system was introduced based on various parameters, including the client's credit history, the sector to which they belong, and their financial solidity. This system allowed to take more informed decisions regarding the granting of credit and the related conditions.
  2. Conduct preliminary checks on clients: to anticipate possible future risks, it is useful to carry out a series of preventive activities to avoid non-payments and insolvencies in the long term. Very important is the analysis of the economic and financial trend of the last few years of our potential partner, to understand its reliability. The company in the case study has implemented a two-phase verification process: the first phase through an initial check carried out by the sales team, the second phase with a more in-depth analysis performed by the Credit Committee.
  3. Allow Sales Team to offer credit terms autonomously within certain thresholds: after completing steps 1 and 2, define a set of rules that allow the sales team to extend credit terms to customers quickly and securely. In the case of the company analyzed, the sales team has the authority to grant credit up to a certain amount, while credit requests higher than this had to be approved by the Credit Committee.
  4. Don't overlook the follow-up: clearly establish the follow-up procedures and rules for each sector and ensure that everyone involved in the sales and credit process is aware of them. The company in the case study has implemented an automated monitoring and alert system that promptly reports any delays in payments, allowing those responsible to quickly intervene to resolve the situation.

The Importance of choosing Credit Insurance today

The current global economic context, characterized by an increase in inflation, liquidity issues, and a consequent increase in insolvencies, makes it even more important to consider credit insurance.

It should not be seen as a burden or an additional activity, but rather as an opportunity that allows not only to expand the business more serenely, but also to have valuable information on the performance of their customer portfolio and cover the risk associated with non-payments.

It is important to consider that for every loss, the company must generate additional turnover needed to compensate for defaults, thus justifying the investment in the insurance policy.

In conclusion, the presented case study demonstrates the importance of a well-structured Credit Management process accompanied by the introduction of credit insurance to protect their business from insolvencies. By following the key steps discussed and adopting the right strategies, companies can optimize their credit management, reduce losses, and take full advantage of growth opportunities in local, regional and global markets.