What Is Credit Management? An Easy-to-Understand Guide to Its Importance, Methods, and Cost Reduction

What Is Credit Management?

Credit management refers to the act of granting credit to a business partner, acknowledging their ability to pay in B2B transactions.
In B2B business, it is standard practice to provide goods or services first and receive payment later. However, if a business partner suddenly goes bankrupt, there is a risk that the accounts receivable will become uncollectible.

Therefore, when conducting business, it is necessary to determine whether a company is capable of making payments by the due date. This process is often referred to as "extending credit" or "conducting a credit review," and it is used to determine transaction terms after assessing the creditworthiness of the partner.

• Credit Approval: Judging that the partner has sufficient payment capacity.
• Extending Credit: Investigating and evaluating the partner's credit information and payment capacity.
• Credit Risk: The risk that payment cannot be collected.

What Is Credit Control?

Credit control refers to managing transactions between companies to minimize the risk of uncollectible accounts receivable.
Specifically, it involves implementing "credit investigations" or "credit reviews" to limit sales amounts or volumes to partners, and to verify their payment capacity and operational status.

The necessity of credit control increases as transaction volumes and the number of customers grow.

★★★★ Links to Other Articles ★★★★ ★★★★ Links to Other Articles ★★★★

Difference Between Credit Control and Receivables Management

• Credit Control: Refers to pre-transaction management, such as investigating and evaluating a partner's creditworthiness before starting business to prevent uncollectible accounts.
• Receivables Management: Refers to activities performed after a transaction to ensure the collection of existing receivables (accounts receivable), including tracking payment status and addressing delays or non-payment.

Credit control and receivables management are closely related.
It is easy to understand them in chronological order: "Pre-transaction check (Credit Control) → Post-transaction collection follow-up (Receivables Management)."

Importance and Purpose of Credit Control

The reasons and purposes for credit control are as follows:

Risk Avoidance: Preventing Bankruptcy While Profitable and Chain-Reaction Bankruptcies

Even if there are sales, if actual payments are delayed, cash flow will deteriorate, potentially leading to "bankruptcy while profitable."
Furthermore, there is the risk of "chain-reaction bankruptcy," where your company is dragged down if a business partner goes bankrupt. By thoroughly implementing credit control, these fatal situations can be prevented in advance.

Maintaining External Credit and Corporate Image

If cash flow deteriorates due to non-payment by a business partner, it can affect payments to suppliers, potentially damaging your company's social credibility.
Establishing a credit control system is crucial for maintaining stable cash flow and corporate health.

Costs Required for Credit Control and How to Reduce Them

Fees for Credit Reporting Agencies

Since credit investigations require extensive information gathering, it is common to outsource them to credit reporting agencies.
However, costs often range from 15,000 to 24,000 JPY per company, and these costs increase as the number of business partners grows.

Ways to Reduce Costs

If you wish to reduce costs, it is recommended to perform primary screening in-house using corporate databases, and only request detailed investigations from specialized agencies when necessary.

• In-house capabilities (checking financial statements, interviewing sales representatives, checking via corporate databases, etc.)
• Requesting specialized agencies as needed (anti-social force checks, detailed partner investigations, etc.)

Recommended Articles:
What Is the Significance of Introducing a Credit Management System? Selection Points Included! ▶

Overall Flow and Process of Credit Control

Credit control is broadly divided into two stages: "Pre-transaction" and "Post-transaction."

Pre-transaction Steps

1. Information Gathering and Analysis

• Check financial statements, business details, representative information, and industry trends.
• Use external corporate databases as needed.

2. Creditworthiness Evaluation

• Quantitative Evaluation (Sales, Equity Ratio, Profit Margin, etc.)
• Qualitative Evaluation (Management Policy, Reputation Among Competitors, Competitive Advantage in the Industry, etc.)

3. Setting Credit Limits

• Set Transaction Caps or Credit Transaction Limits Based on Creditworthiness.

4. Negotiating Contract Terms

• Finalize Transaction Terms Considering Credit Limits, Payment Cycles, and the Presence of Collateral.

Post-transaction Steps

1. Monitoring Receivables and Credit Limits

• Check for Payment Delays on an Ongoing Basis.
• Confirm That Transactions Do Not Exceed Credit Limits.

2. Periodic Reviews

• Periodically Collect the Latest Information on Partners to Reflect Changes in Management Status and Creditworthiness.
• Adjust Credit Limits or Renegotiate Transaction Terms as Necessary.

Specific Methods and Investigation Techniques for Credit Control

Investigation techniques for evaluating business partners in credit control are divided into four main categories.

In-house Investigation

• Sales or accounting staff check past transaction history and payment records.
• No cost, but the scope of information tends to be limited.
• Risk of inconsistent evaluations due to subjective judgment.

External Investigation

• Utilize information from corporate databases.
• Can collect information from multiple angles, including not only quantitative data but also corporate news and ratings.
• Incurs certain costs, but provides high-precision information.

Direct Investigation

• Visit the partner company to speak with them and grasp the management's vision and company atmosphere.
• Leads to stronger relationships, but requires significant time and effort.
• Information obtained may be subjective.

Outsourced Investigation

• Obtain detailed reports from professional investigators.
• Useful when it is difficult to obtain information independently, such as for overseas companies.
• Investigation costs per company are high, so it is easy to limit to high-priority partners.

Points to Note in Credit Control

Points to note in credit control are as follows:

Strengthening Coordination with Sales Teams

Credit control is not something that can be completed solely by the administrative department.
It is important to have a system where sales representatives who visit partners directly can share "subtle changes" or "unnatural points" felt on-site with the administrative department.

• Behavior of representatives, company atmosphere, reactions to payment cycles, etc.
• Do not overlook small signs such as "recent frequent delays" or "sudden change of contact person."

Multifaceted and Objective Information Gathering

Combine quantitative evaluation (financial indicators) and qualitative evaluation (reputation and management personality) to make judgments as objectively as possible.
To prevent reliance on individual judgment, it is important to utilize external databases and incorporate third-party opinions.

Avoid Excessive Costs and Time

It is also important not to spend too much cost or time when conducting credit investigations.
If you perform detailed investigations on all business partners, it may consume a vast amount of time and money.

First, utilize corporate databases for screening to narrow down companies that require detailed investigation, which can easily reduce costs.
For companies above a certain rating, it is advisable to proceed with transactions based on the results of the primary check.

Use uSonar for Credit Control and Anti-Social Force Checks

"uSonar" is a service that allows all employees to perform credit, anti-social force, and compliance checks on business partners instantly at any time.
With proprietary matching technology, it accurately identifies companies with the same names or past company names, allowing you to quickly grasp risks without hindering sales activities.

Three Challenges Solved by uSonar

1. Eliminating Anxiety Over Company Identification: Even if there are many companies with the same name, such as "Assist," you can check them accurately without confusion.
2. Lack of Risk Information: Batch tracking of newspaper articles, public agency data, individuals, and related companies from the past 30+ years.
3. Effort and Delays in Credit Checks: Link with SFA (such as Salesforce) to check anti-social information and credit ratings immediately after exchanging business cards.

Main Services and Indicators

• Caution: Risk classification into 9 categories based on public information such as anti-social forces and administrative actions.
• DeepCheck: Automatically detects companies requiring caution the moment they are registered in Salesforce.
• Credit (Rating): Evaluates risk with scores based on company size and financial status.
• Corporate Dissolution Score: Rated in 8 levels based on dissolution and bankruptcy data.
• W&G / Economic Security (Scheduled for implementation): Simple checks for human resources, environment, and overseas risks.

By utilizing "uSonar," you can streamline and increase the precision of credit control and anti-social force checks, making it easier to prevent major risks such as bankruptcy while profitable and chain-reaction bankruptcies.
Please check the details below.
uSonar Usage: All Employees Can Perform Credit, Anti-Social Force, and Compliance Checks Instantly at Any Time ▶