What Is Credit Management? A Comprehensive Guide to Its Importance, Methods, and Cost Reduction

What Is Credit?

In B2B transactions, "Credit" refers to granting a business partner the trust that they have the "ability to pay."
In B2B transactions, it is common to provide goods or services first and receive payment later. However, if a business partner suddenly goes bankrupt, there is a risk that accounts receivable cannot be collected.

Therefore, when conducting business, it is necessary to determine whether the company is capable of making payments on time. This process is referred to as "extending credit" or "conducting a credit review," where transaction terms are determined after assessing the creditworthiness of the partner.

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

What Is Credit Management?

Credit management is the practice of managing B2B transactions to minimize the risk of uncollectible accounts receivable.
Specifically, it involves setting limits on sales amounts or volumes for business partners, and conducting "credit investigations" or "credit reviews" to verify their payment capability and operational status.

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

Difference Between Credit Management and Receivables Management

• Credit Management: Refers to pre-transaction activities such as investigating and evaluating a partner's creditworthiness to prevent uncollectible accounts receivable.
• Receivables Management: Refers to activities to ensure the collection of already generated receivables (accounts receivable) by tracking payment status after the transaction and addressing delays or non-payment.

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

Importance and Purpose of Credit Management

The reasons and purposes for credit management are as follows:

Risk Avoidance: Preventing Profitable Bankruptcy and Chain-Reaction Bankruptcy

Even if there are sales, if actual payments are delayed, cash flow will deteriorate, potentially leading to "profitable bankruptcy."
Furthermore, if a business partner goes bankrupt, there is an undeniable risk of "chain-reaction bankruptcy," where your company is also affected. Thorough credit management can prevent these critical situations.

Maintaining External Credibility and Corporate Image

If cash flow deteriorates due to non-payment by a business partner, it may affect payments to suppliers, potentially damaging your company's social credibility.
Establishing a credit management system is essential to maintain stable cash flow and corporate health.

Costs Required for Credit Management and How to Reduce Them

Costs for Requesting Credit Investigation Agencies

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

Tips for Reducing Costs

If you want to reduce costs, it is recommended to use corporate databases for internal primary screening and only request professional agencies when more detailed investigations are necessary.

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

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Overall Flow and Process of Credit Management

Credit management 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.
• Utilize external corporate databases as necessary.

2. Creditworthiness Evaluation

• Quantitative evaluation (e.g., sales, equity ratio, profit margin).
• Qualitative evaluation (e.g., management policy, reputation among competitors, competitive advantages in the industry).

3. Determination of Credit Limits

• Set transaction caps and credit lines for each transaction based on creditworthiness.

4. Negotiation of Contract Terms

• Finalize transaction terms by considering credit limits, payment terms, and the presence of collateral.

Post-Transaction Steps

1. Monitoring of Receivables and Credit Limits

• Monitor for any payment delays on an ongoing basis.
• Verify that transactions do not exceed established credit limits.

2. Periodic Reviews

• Periodically collect the latest information on the counterparty to reflect changes in their financial status and creditworthiness.
• Adjust credit limits or renegotiate transaction terms as necessary.

Specific Methods and Investigation Techniques for Credit Management

Investigation techniques for evaluating business partners in credit management are broadly divided into four categories.

Internal Investigation

• Sales and accounting departments verify past transaction history and payment performance.
• While cost-effective, the scope of information tends to be limited.
• There is a risk of inconsistent evaluations due to subjective judgment.

External Investigation

• Utilize information from corporate databases and other sources.
• Allows for multi-faceted collection of data, including not only quantitative figures but also corporate news and credit ratings.
• Requires a certain level of cost but provides high-precision information.

Direct Investigation

• Visit the business partner to conduct interviews and grasp the management's vision and corporate culture.
• Strengthens relationships, but requires significant time and effort.
• Information obtained may be subjective.

Commissioned Investigation

• Obtain detailed reports prepared by professional investigators.
• Useful when it is difficult to obtain information independently, such as for overseas companies.
• Since the investigation cost per company is relatively high, it is best reserved for high-priority business partners.

Points of Caution in Credit Management

Key points of caution in credit management are as follows.

Strengthening Collaboration with the Sales Frontline

Credit management should not be handled solely by the administrative department.
It is crucial to establish a system where sales representatives, who visit business partners directly, share "subtle changes" or "irregularities" noticed in the field with the administrative department.

• Observe representative behavior, corporate atmosphere, and reactions to payment terms.
• Do not overlook small signs such as "recent frequent delays" or "sudden changes in personnel."

Multi-faceted and Objective Information Gathering

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

Avoiding Excessive Costs and Time

It is also important not to spend excessive costs and time when conducting credit investigations.
Performing detailed investigations on every business partner can consume vast amounts of time and money.

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

Use uSonar for Credit Management and Anti-Social Force Checks

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

Three Challenges Solved by uSonar

1. Eliminating Uncertainty in Corporate Identification: Even with many companies sharing names like "Assist," you can check them accurately without confusion.
2. Lack of Risk Information: Track everything from newspaper articles over the past 30 years and public agency data to personnel and affiliated companies in one go.
3. Effort and Delays in Credit Checks: Integrate with SFA (such as Salesforce) to check for anti-social information and credit ratings immediately after exchanging business cards.

Main Services and Indicators

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

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