Business news and publications are beginning to speculate that an economic downturn is on the horizon especially in light of the upcoming U.S. elections and continuing downsizing and realignments in the manufacturing sector. This early forecast should serve as a wake-up call to all credit professionals to begin a more pro-active approach to managing their at-risk current and early stage delinquent customers. Many credit professionals today were not around during the 80’s, the last serious downturn, to remember the chaos created by their organizations not being adequately prepared.

Utilizing innovative customer management strategies to identify at-risk customers can curtail future credit losses by reducing the overall risk exposure and at the same time assisting the at-risk customer before it is too late for all concerned. By establishing early contact prior to the customer reaching their maximum credit limit or degree of delinquency, the credit professional can work with the customer to identify potential internal and external options that will assist through a period that is often both confusing and difficult. Initiating this approach will help in reducing delinquency in the early stages which is critical because customers who are historically 60 plus days past due are 50% more likely to be candidates for write off than those customers who are not. More importantly, the credit professional can prevent full utilization of the customer’s credit limit by pro-actively reviewing at-risk current customers at pre-determined utilization levels, thereby reducing the overall delinquent dollars sliding into collections.

The conscientious credit professional will ignore the limitations of traditional collection processes that require the customer to reach a certain level of delinquency before action is undertaken and will instead focus on the customer’s current economic condition to determine the most appropriate course of action needed to avoid future losses.

Effective customer management will require a combination of traditional risk analysis and customer contact referrals with the addition of transaction risk analysis to help quickly identify changes in behavior that may indicate a change in a customer’s risk profile. This will involve combining manual reviews with any automated system controls already in place so the difficult credit/exposure decisions on at-risk accounts can be made using more up-to-date information.

There are two primary sources of data available in most organizations: Internal and External Risk Data. Internal sources include information from sales, operations, and, in some cases, prospect databases. External data sources, principally obtained from credit reports, industry groups and direct referrals, are combined with internal data to identify trends and assist in establishing overall account management strategies. An additional external source of information today, often overlooked, is the Internet.

Method of strategy development is dependent on the type, quantity, and availability of information, accessible tools, and the skills of people developing strategy.  Established credit evaluation techniques use account management strategies that are primarily based on judgmental consensus. Credit professionals should leverage intuition aided by simple information analysis to develop decisions, and then validate them by generating reports to estimate the potential workload. The success of this method is greatly determined by the experience level of each professional.

Recently, the addition of credit scoring in the commercial sector has provided a platform for providing the credit professional the opportunity to develop an at-risk customer strategy program to existing policies and procedures. The actions resulting from at-risk strategies can include: reducing credit lines, canceling open accounts, increasing account reviews or, in some cases, assigning accounts to one specifically trained group to work with at-risk current customers.

Managing the at-risk customer account requires more than one assigned department. A customer relationship management group made up of sales, credit and customer service, need to be established to implement, and when necessary, revise strategies to minimize any potentially negative customer impact. Depending on the type of strategy and how it is implemented, results should be tracked on a weekly and monthly basis until a general comfort level is realized. It is also imperative that the strategies implemented be frequently challenged because changes in credit behavior frequently change over periods of time. The chosen strategy should be used only on those customers who continually demonstrate that they are a potential at-risk account.

Among the processes to be considered when implementing an at-risk program are:

Internal Referrals

Ideal Expectations

Credit Decision Analysis

Credit Report Updates

Customer Service

Fraud Detection

Automated Decisions

Manual Reviews

Account History Review

Increase / Decrease Exposure Criteria

Financial Condition Assessment

Account Closure

Once the at-risk credit review begins, the credit professional will determine, by reviewing the customer’s current credit file and internal account history, if the customer identified by the targeted strategies makes sense. If the information is validated to be accurate, the appropriate credit decision will be made and an adverse action letter will be mailed to the customer explaining the reasons for the action. If more information is required to make the final decision, the customer should be contacted directly. During these discussions with customers, credit professionals should look for positive or negative indicators to make an assessment of the customer’s current financial condition. This includes determining if the customer has both the willingness and the ability to sustain timely future payment. If the customer indicates a financial strain, it will be important to understand if they are experiencing a short-term or seasonal difficulty (30 – 90 days) or serious hardship (longer than 90 days).

Once an at-risk management program has begun, the results need to be evaluated and measured. Usually form an automated decision standpoint results can be measured by traditional portfolio performance measures (DSO, etc.). From a manual judgmental standpoint, decisions need to be actively measured for consistency. This can be evaluated by measuring the performance / value of questionable A/R balances saved from going delinquent, and the good balances maintained and/or grown. In addition, collectors need to be evaluated using traditional collection measures to determine how effective they are in getting the at-risk customer to keep their promises. These evaluations should then be pooled together to understand the overall value that the at-risk customer management program is providing to the organization.

The most important thing to keep in mind when executing an at-risk program is managing customer perception. While customers may have a difficult time understanding why you are taking actions on their current account, a properly executed program can actually turn effected customers into your biggest fans. Earning a reputation as a company willing to help their customers during both the good and bad times will long be remembered over any initial negative resistance, once the customer has rebounded back from bad times.

Finally, credit professionals need to remember that they are in compliance with credit and collection laws and regulations when working within the perimeters of their at-risk program; The Equal Credit Opportunity Act (ECOA), Regulation B: ECOA; and Fair Credit Reporting Act (FCRA) along with any state laws governing debt collection. The standard adverse action notifications will be required for any negative actions taken on customer’s accounts, and it will also be important to safeguard against dunning current customers unless invoking §2.609 of the Uniform Commercial Code.

Collections have always been challenging and even more so during a slow economy. By being proactive and removing the boundaries of traditional collection practices, progressive credit professionals will be able to win their rightful place at the top of the customer’s payment ladder during difficult times.

Companies that offer ways to help their customers through difficult times will not only survive, but will most likely gain loyal customers, while those that continue to follow the traditional collection methods, will continue to struggle.

I wish you well.  

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.