How customer credit is processed, step by step

Customer credit runs as a loop. Policy is set first. New applicants are then assessed and given a limit. Live accounts are watched against that limit, results are reported, and accounts that break policy are suspended until they qualify again. Credit staff do most of the work. Sales and finance leadership hold key decisions.

The steps in order

1. Set the credit policy. The credit manager drafts it, and the finance director or CFO signs it off. Policy covers who qualifies for terms, how limits are sized, approval authority at each limit tier, and the conditions that trigger a hold or suspension. Sales leadership should be consulted, because the policy shapes what they can promise customers.

1. Collect the application. A sales representative usually gathers the form from the prospect, along with trade references, bank details and, for larger requests, financial statements. A credit analyst checks the package is complete before any assessment starts. Incomplete files are the most common cause of delay here.

1. Assess the applicant and decide. The analyst pulls a bureau report, reviews payment behaviour with other suppliers and applies the scoring model. A recommendation follows: a limit, payment terms and a risk class. Whoever holds authority for that limit tier approves or declines. Large or unusual requests go up to the credit manager or a credit committee.

1. Create the account in the system. Master data staff enter the approved limit, terms and risk class in the ERP. The analyst then confirms the record matches the decision. Errors at this point tend to surface much later, when an order is wrongly blocked or wrongly released.

1. Manage holds as orders flow. Once trading begins, the system checks each order against available credit. Orders that push exposure past the limit, or that come from an account with overdue balances, drop into a hold queue. Analysts work that queue, releasing, partially releasing or escalating. Sales often lobbies hard at this stage.

1. Review existing accounts. Analysts revisit live customers on a schedule set by risk class, and outside the schedule when something changes: a payment slips, a bureau alert arrives, ownership changes, or the customer asks for more headroom. Limits may rise, fall or stay put.

1. Track score history and forecast credit needs. The credit manager looks across the whole portfolio. Which customers are drifting toward higher risk? Where will exposure concentrate when sales peaks arrive? This work draws on sales forecasts from commercial teams and cash plans from treasury, so limits can be planned before demand hits.

1. Record adjustments and resolve disputes. Billing or accounts receivable staff post credit memos and adjustments when invoices are disputed or corrected. Analysts need these posted promptly, because an unresolved dispute inflates apparent overdue balances and can trigger holds that should not happen.

1. Produce credit and collection reports. The credit team prepares ageing, exposure by customer, hold activity and collection performance. The controller uses them for the bad debt reserve. Sales leadership and the CFO receive their own views. Where policy and law allow, delinquent accounts are also reported to credit bureaus.

1. Suspend or reinstate accounts. When an account breaches policy, the credit manager suspends it, collections pursue the balance, and sales is told before the customer is. Reinstatement follows the same policy in reverse: the debt is cleared or a payment plan is honoured, a fresh review is done, and a new limit is set. Accounts judged uncollectable pass to the write off process.

Where the handoffs tend to slip

The gap between steps 3 and 4 is where approved decisions get mistyped. The gap between steps 8 and 5 is where stale disputes block good customers. And step 7 is often skipped entirely, which leaves limits set for last year's trading pattern.

Sales involvement deserves attention. In many businesses the representative who collects the application also argues for its approval, then argues for releasing the held order. That is normal. What matters is that the person deciding is separate from the person selling.

Questions to ask the people who run it

The documented process and the lived one often part ways. These questions help find where.

• When an order is held, who actually releases it, and does that person have the authority on paper?
• Are there customers whose limits are routinely overridden? Why?
• How often are scheduled reviews done on time, and which ones get skipped first when the team is busy?
• Where does the scoring model disagree with analyst judgement, and who wins?
• Do analysts hear about disputed invoices from billing, from sales, or from the customer?
• Which reports does anyone read and act on? Which are produced out of habit?
• When an account is suspended, who tells the customer, and does sales ever learn of it from them?
• What workarounds exist outside the ERP, such as spreadsheets of approved exceptions or informal limit increases agreed by email?
• How is reinstatement handled in practice? Is a fresh review done, or is the old limit simply switched back on?
• If the policy were rewritten tomorrow, what would the team want changed first?

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.