Credit granting procedure

A credit review process is needed to ensure that a business does not grant credit to customers who are unable to pay. The credit department handles all credit reviews. The department may receive paper copies of sales orders from the order entry department, documenting each order requested by a customer. In this manual environment, the receipt of a sales order triggers a manual review process where the credit staff can block sales orders from reaching the shipping department unless it forwards an approved copy of the sales order to the shipping manager.

The order entry procedure for a manual system is outlined below.

  1. Receive sales order. The order entry department sends a copy of each sales order to the credit department. If the customer is a new one, the credit manager assigns it to a credit staff person. A sales order from an existing customer will likely be given to the credit person already assigned to that customer.
  2. Issue credit application. If the customer is a new one or has not done business with the company for a considerable period of time, send them a credit application and request that it be completed and returned directly to the credit department. This may be done by e-mail to speed the application process.
  3. Collect and review credit application. Upon receipt of a completed sales order, examine it to ensure that all fields have been completed, and contact the customer for more information if some fields are incomplete. Then collect a credit report, customer financial statements, bank references, and credit references.
  4. Assign credit level. Based on the collected information and the company’s algorithm for granting credit, determine a credit amount that the company is willing to grant to the customer. It may also be possible to adjust the credit level if a customer is willing to sign a personal guarantee.
  5. Hold order (optional). If the sales order is from an existing customer and there is an existing unpaid and unresolved invoice from the customer for more than $___, place a hold on the sales order. Contact the customer and inform them that the order will be kept on hold until such time as the outstanding invoice has been paid.
  6. Obtain credit insurance (optional). If the company uses credit insurance, forward the relevant customer information to the insurer to see if it will insure the credit risk.
  7. Verify remaining credit (optional). A sales order may have been forwarded from the order entry department for an existing customer who already has been granted credit. In this situation, the credit staff compares the remaining amount of available credit to the amount of the sales order, and approves the order if there is sufficient credit for the order. If not, the credit staff considers a one-time increase in the credit level in order to accept the order, or contacts the customer to arrange for an alternative payment arrangement.
  8. Approve sales order. If the credit staff approves the credit level needed for a sales order, it stamps the sales order as approved, signs the form, and forwards a copy to the shipping department for fulfillment. It also retains a copy.
  9. File credit documentation. Create a file for the customer and store all information in it that was collected as part of the credit examination process.

Related Courses

Credit and Collection Guidebook 
Effective Collections