One of the most useful, important, misunderstood and aggravating tools of the petroleum company credit department is the credit hold. This automated process, which is designed to interrupt the flow of product to your customer, is so critical it is often a priority to credit staff, not only first thing upon arriving at work, but also on nights and weekends. Should this account be on hold? Should this hold be released? The process demands an answer, the quicker the better, and is often for the same customers over and over.
Is the credit hold a critical tool for credit underwriting? It absolutely is. Is the credit hold an important mechanism to help train customers to pay on time, or be at risk for product runouts? It absolutely is. Is the credit hold potentially the most interruptive system in the credit function, causing a complete stop to other very important, time sensitive tasks like collecting past due balances? It absolutely is.
Credit managers operating with faulty parameters can literally spend half their day reacting to credit hold analysis and release. When this occurs, high-level managers are not doing much managing, and the cost of administrative attention can even be much higher than the dollars of additional credit risk.
Credit holds are misunderstood because they should be utilized as a hard stop only in situations that warrant the stop, not for the myriad other hold-triggers like back-office software sensitivity, credit balances, $1 over credit limit, etc.
If unnecessary credit holds are a problem in your credit department, it is a worthwhile project to analyze why the holds are occurring so frequently, and work with IT to correct the problem. Start with analyzing:
- Software – why are holds occurring for anything other than the parameters that should be triggering a hold?
- Review and potentially reset hold parameters including customer credit limits. Those limits might warrant a % increase that will avoid the hold and not create meaningful credit risk increase.
- Perform a complete credit review on frequent credit hold customers to determine why they are exceeding their limits and how it can be corrected. A solution might be shortening terms a bit to keep the credit limit within a comfortable risk level.
Keeping the credit hold triggers efficient and up-to-date with current customer needs ensures the tool will be working for your credit department, not against it.