Borrowing is usually inevitable for most people. Especially when it comes to starting and running businesses, many have to borrow. That is why financial institutions that focus on lending money are many nowadays. Credit management is not a stroll in the park kind of business. There are so many variables at play and so much at stake. If you are not careful you can suffer crippling credit loss. To avoid that from happening to you, you must know the things to avoid. Thus in this article, I am looking at the 7 deadly sins of credit management.
Being In Denial
The ideal scenario is for a credit to proceed as planned. Honestly even the borrower would ideally want things to go according to plan. However, we live in a mercurial world where circumstances are constantly changing. This means a credit might begin to encounter some challenges due to some circumstances. It becomes dangerous once you notice this to get into denial.
This is when you literally comfort yourself that the credit is safe and repayment will be done as previously agreed on. It can be hard to acknowledge the fact that things are beginning to fall apart. However, being in denial can only exacerbate the problem at hand. Once you begin to see red flags it is prudent to spring to action to figure out how to deal with the problem. The earlier the better and probably the less or none at all the credit loss might be.
This is somewhat tied to the previous talking point I just dealt with. Denial implies you see something is wrong but you tell yourself it is no big deal. There is also another scenario where you do acknowledge there is something wrong but you put off addressing it. The longer you wait the harder and more costly it will be to address the issue. Wait or delay any longer and you might end up with nothing to salvage. Never delay and you must even avert issues before they happen. You can do this by proactively engaging your clientele to always ensure all is well.
It is all too common that lenders compromise on their standards. Whenever money is borrowed there are clear provisions of the arrangement that must be signed on. It should be clear how much, how often, how and by when repayments should be done. A lender must never make the mistake of compromising and giving borrowers leeways that violate defaulting stipulations previously agreed on. This creates a tricky scenario where things, later on, are done without any reference point or guiding principles. It can become exponentially even harder to manage the credit once compromises are made.
Giving Out More Debt Carelessly
This can be a very sticky and tricky scenario that can seem good sometimes. On the surface lending more to a running credit to resolve some issues can seem noble. However, in some cases, it can actually worsen the issue or simply manage it. You must diligently take time to really into whether or not lending more will address the root cause. If you do not you might even up with far bigger problems and more credit losses.
Not Thoroughly Going Through The Paperwork Prior
I think this applies to both parties i.e. your paperwork as a lender and the borrower’s paperwork. As for yours, you must thoroughly go through it to ensure there are no shortfalls and loopholes. Essentially if there are loopholes the borrower can use them to your detriment. Then you must also thoroughly go through the borrower’s paperwork to ensure everything is in order. If you miss on certain things they might catch up and deal with you later. Never be in a rush to authorise credit without a thorough review of the paperwork from both sides.
Not Working As A Unit
In managing credit, you, as a lender, must have a united workforce. Having divisions amongst your team can be to your demise if you are not careful. Your workflows must be well arranged and agreed on; there should not be any weak links. In principle, it is recommended that lenders should not issue loans they are not emotionally attached or linked to. This will go a long way in averting misunderstandings that can arise later.
Heavily Depending On Guarantors
This is a grave sin that can cause headaches for your firm. Of course, there are times when you have to turn to guarantors. This can usually occur when a borrower does not satisfy your conditions to access a loan. Understand that bringing in a guarantor tends to complicate things. Agreeing on approaches or workflows can become heavily contentious especially if you do not agree on certain things. Murky outcomes can occur if this guarantor working arrangement is not managed well. Thus it is wise to limit such arrangements that involve guarantors.
These are the 7 deadly sins of credit management you must never commit. The good thing is that they can be avoided and even when accidentally committed they can be addressed. The most important thing you must cultivate is open, free, and regular communication internally and externally. This helps get rid of biases, disparities, and establish common ground all the time. That way any likely problems can be spotted in advance and averted effectively. There must be such engagement within your firm (internally) and also with your clients (externally).
Thanks for the information
You’re welcome Miriam…