An article from Frank Knight at Debtsource :

Companies differentiate themselves from their competitors through strategic drivers. Price, quality, product and service are the usual candidates companies focus on to beat the opposition. Credit as a competitive advantage usually doesn’t make it to the agenda of the strategy session. But, is there more to credit than meets the eye, and can credit indeed be considered a competitive advantage?

In the world of consumer credit, credit as a competitive advantage is a very well established practice. Some of South Africa’s largest retailers do not necessarily sell product that is unique to them, any cheaper, or of a better quality than the store next door – yet they have grown to monolithic proportions by simply offering consumers an easier way to pay for their product – in other words they have used credit as the driver to differentiate their offering.

In commercial credit the opportunity to use credit as a driver in the business is less obvious, but the impact this could have can also be significant. The difficulty with commercial credit is primarily skills, coupled to a lack of understanding of this tool by senior management. Where companies do employ the services of a suitably qualified credit person this position is mostly confined to that of a middle management function, literally meaning that the credit manager is confined to making operational decisions, as opposed to strategic ones. To test this statement simply check with practically any such manager when last they were invited to the company’s “think-tank” session! Where companies do not employ such credit management skills, credit extension policies usually either border on reckless or are designed to avoid the maximum possible risk.

But exactly where does the opportunity to use commercial credit as a strategic driver lie? The starting point is the realisation that the value of credit management is the ability not only to collect overdue accounts or to avoid bad debts, but rather to enable a company to achieve the maximum overall profitability from trading. Once this fact has been established – think of all the credit decisions that are made within a business daily as being categorised into three main groups – “Yes”; “No” and “Refer” decisions. The Yes and No decisions are usually quite clear cut for even “somewhat competent” decision makers, but the Refer decisions are the ones where the opportunities lie.

In a typical debtors book the Refer decisions can comprise 25% of total, which in revenue terms can be significant. These are the credit decisions where careful consideration needs to be given to all the factors regarding the client’s credit ability and the whole range of possible solutions (such as securities, terms and payment arrangements) needs to be weighed – clearly a job for an expert. Cut this level of customer out of your credit processes and you’ll lose money. Include them all without due consideration and losses will follow.

These are typically customers that can’t secure credit facilities at will and therefore will be prepared to pay a bit more for your product, so with the correct and appropriate credit structuring can be highly profitable. Simply put – if you become better at selecting Refer customers than your opposition you’ll make more money. Be vigilant though not to allow anyone to make a decision on the Refer group that only view the transaction from a risk perspective or from a “turnover at any cost” perspective, as these could have disastrous results. An admirable example here is where decisioning is made exclusively by credit insurers, who often have no insight into the company’s overall strategy and whose primary aim is to avoid risk. In such an instance risk may very well be avoided, but at what cost to the business?

Senior management need to provide a clear message to credit – what is the business strategy? “Are we trying to grow the turnover aggressively, or are we merely trying to protect the present base we have.” The execution of the credit decisions will be significantly different for both scenarios. The key though is to align the credit strategy to the overall business strategy.

In the final analysis, there can be little doubt that credit extension can be a competitive advantage, even in a commercial credit environment – however the advantage can only be executed effectively if the underlying credit decisions are made by competent experts. Credit extension (as the primary source of corporate revenue) can be your best friend or your worst enemy. Central to making credit your friend is the acknowledgement that this is indeed a competitive advantage