Debtor management is a strategy that involves the process of designing and monitoring the policies that govern how a company extends credit to its customer base. The idea behind this process is to minimize the amount of bad debt that the company will eventually incur due to customers failing to honor their commitments to repay the total amount of the credit purchases. Typically, the process of debtor management begins with evaluating potential customers in terms of credit worthiness, identifying a credit limit that carries a level of risk that the company is willing to assume, then monitoring how well the customer makes use of that available credit, including making regular payments within the terms and provisions associated with the credit account.
One of the basics of debtor management is to accurately assess what type of credit line to extend to a given customer. A number of factors go into making this determination, including the credit rating of the client, current ratio of debt to average income, and the presence of any negative items on the customer’s credit reports. With this information in mind, it is possible to have some idea of how much credit the customer can reasonably be expected to manage and not present a high risk for defaulting on any outstanding balance.
Even after the credit limit is set, debtor management requires careful monitoring of how the client chooses to responsibly manage that limit. This includes determining if at least the minimum required payment is made on time each billing period, how often the customer pays more than the minimum, and if the customer does from time to time pay off the entire balance in accordance with the terms and conditions of the credit contract. This monitoring of activity along with periodically checking credit reports to determine if the client has had any changes in ratings that could affect the credit limit, makes it possible for the creditor to reward the customer with an increased credit line, keep the limit at the current level, or reduce the limit as a means of protecting the creditor’s interests.
Along with the fiscal responsibility of the creditor, debtor management also involves evaluating debtor accounts in light of what is happening in the general economy and making changes in credit limits when and as appropriate. For example, a company may feel the need to reduce credit limits for a number of customers when a recession is taking place. This is not due to abuse of the credit on the part of the debtor, but because of the shifts in the economic climate that increase the risk that a greater percentage of debtors on average are likely to default on their open balances. By lowering credit limits, at least until the economic crisis resolves and the economy is stronger, this debtor management strategy further limits the overall amount of losses the creditor can sustain.