Question

Name two ways a bank minimizes credit risk before a loan is made. Name two ways it does this after the loan is made.

Answer 1

Thoroughly test the credit record of a potential client. Finding information about foreign companies can be difficult, particularly for emerging markets. Local consultancy firms may help, use the first sale to start developing the relationship with the customers. Your number one credit risk management strategy for a client is building a long-term, trusting partnership. Obviously, this can take years to accomplish entirely. But start laying the groundwork by talking to a potential customer about your credit terms before you extend the credit. This will help you gage the attitudes of the consumer towards credit, and make sure they understand clearly what you expect from them.

Establish credit caps. You may use resources such as: Credit-agency reports to set a credit cap for a new client, which can provide detailed information on financial history of a business. Bank reports which will detail the bank's relationship with the company, the borrowing ability of the company and its debt level. Audited financial statements, which can offer a clear view of the liquidity, profitability and cash flow of the company.
A sales agreement that contains well-worded, detailed credit terms will mitigate the likelihood of arbitration and increase the chances of being paid on time and in full.

Establish a standard procedure for managing accounts which are overdue. Within the first 90 days after the due date, the chances of collecting on a delinquent account are high.

Apply factoring. To do this, you sell your receivable for its cash value to a factoring service, minus a rebate. This automatically gives you your money and you don't have to wait for payment-instead of you, the customer can pay the factoring service.