As credit professionals, from time to time our credit decisions have been questioned and overridden. Sometimes the credit limit that we established for a new or existing customer has fallen short of expectations or needs. When that happens, either sales or the executive management have asked us to bump it up to meet their sales goals.
Let me start with some of the pitfalls of credit overrides:
Increased Risk of Default – Extending credit beyond the customer’s limit increases the risk of non-payment. If a customer is already showing a weak payment position with the current credit limit, increasing a credit limit may only lead to a payment default.
Cash Flow Can Be Impacted – In view of the increased probability of payment defaults, this can lead to cash flow problems that affect the company’s ability to meet its own financial obligations.
Bad Debt – The likelihood of bad debt increases with credit overrides, impacting the company’s balance sheet and financial health.
Inconsistent Application – Ensuring fair and consistent application of overrides can be challenging, potentially leading to disputes and perceptions of unfairness.
Audit Red Flags – Frequent use of overrides can raise concerns during audits, requiring detailed explanations and justifications.
Now why credit overrides may be necessary:
One-Off or Emergency Situations – Overrides are essential in emergency situations where very good customers need additional product based upon a sudden increase in orders from their end users.
Customer Loyalty – Providing flexibility in periodically increasing credit can enhance customer loyalty and satisfaction, showing that your business cares about your customer’s needs.
Revenue Increase – Allowing credit overrides can lead to higher sales volumes, contributing to business growth.
Competitive Edge – Offering additional credit flexibility can differentiate your business from your competitors with stricter policies, attracting more customers.
Enhanced Customer Experience – Providing seamless and supportive financial solutions can enhance the overall customer experience.
In short, credit overrides can carry significant risk, including increased default risk, financial impact, operational challenges, and potential negative customer behavior. Conversely, they are at times necessary to edge out the competition, support business growth, and enhance customer relationships.
Nancy Seiverd, President
CMI Credit Mediators, Inc.
All Rights Reserved
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