A client risk profile is the level of risk your business is willing to accept from the client while extending credit terms. Businesses manage risks by setting up credit policies which predetermine how much credit should be given and expected terms of payment.
Clients who are given a shorter payment period are deemed to be highly risky hence shorter or zero credit periods should be awarded. Offering credit often encourages customers to speed up or increase the amount of their spending. While that works, balancing the potential for increased sales with the risk of reduced cash flow is an important part of managing risk in your business. The nature of your business and size of transactions, are some factors that make businesses offer credit to new customers. Like any other transaction model, offering goods or services on credit has risks such as reduced cash flow, reduced profit margin and debts which could significantly affect your operations if the transaction size is huge. Before you decide whether to extend credit and if so, how much, there are several key factors you should consider.
Decide on how much risk your business is willing to accept. State your credit terms; how much credit are you willing to extend and how long you can
afford to wait for payment without jeopardizing your operations. What features characterize a customer to whom you are willing to extend credit? Develop a credit policy that covers the credit process starting from application submission to overdue collections.
Analyze the impact of credit to your overall business positioning. The modern market is dynamic characterized by speed and competition and while
spreadsheet methods that help in credit evaluation have worked before, it is important to start exploring alternative data driven ways of evaluating credit policies. Inherently, focus on methods that are efficient and require little efforts.
Businesses have been in a debate over the years on whether to consider
customer risk profiling as relevant when deciding on customer credit. It
is mostly with financial institutions that risk profiling has been taken
with full attention, this is influenced by the policies laid down. Over the
years, financial institutions have developed mechanisms to mitigate the
risk of lending to borrowers by performing a credit analysis. A decision is
arrived at after evaluating five key factors that predict the probability of
a borrower defaulting on his debt called the five Cs of credit which
include capital, capacity, conditions, character, and collateral. In spite of
the five Cs, most lenders place the greatest amount of weight on a
borrower's capacity.