As credit professionals, it seems intuitive that a credit limit review should be performed on a regular or periodic basis. If reviewing credit limits involves obtaining a fresh credit report along with other substantiating documentation, one may uncover some negative information that you might normally not have seen.
I remember a few years ago how one client’s customer seemed to be going along as usual, always regularly purchasing the same amount of product, and always paying on time. When a new credit manager came in, she did a review of all the active customers and discovered that this customer’s credit report showed a trademark infringement judgment for over one million dollars. In view of the customer’s size, this was very worrisome. The result was that after some in depth internal discussions, as well as with the customer, credit limits and terms were adjusted.
Conversely, a review might not uncover anything special. If the customer has been purchasing on a regular basis, and payments were made on time, that’s reassuring. However, this may also be a missed opportunity. Perhaps increasing the customer’s credit limit may be in order.
In other words, even though the customer may not be requesting a higher credit limit, if a higher credit limit can be supported, this may be good news for your sales team, which may be on the lookout to sell more products to existing customers. As you know, as credit risk professionals, one of our goals is to try and maximize sales safely.
My only suggestion is that a credit review be performed at least once per year on all active customers (customers who have purchased within the last year) and then on a need only basis for new customers, old customers who haven’t purchased in a long time, and existing customers when there are special credit requests or something about the business relationship has changed.
Nancy Seiverd, President, CMI Credit Mediators Inc.
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