What is credit management, how do you do it well, and what are its benefits?

Credit management refers to the process of granting credit to your customers, setting payment terms and conditions to enable them to pay their bills on time and in full, recovering payments, and ensuring customers (and employees) comply with your company’s credit policy.

According to the 2025 UK Payment Survey, an overwhelming 90% of UK businesses are facing payment delays, with nearly half reporting these issues more frequently than in the past. This is significantly higher than other European countries. The consequences are stark as the Government’s own Commercial Payments Bill overview states late payments cost the UK economy £11 billion a year.

The knock-on effect is that late payments by your customers have implications on your creditworthiness. That’s why credit and debt management are essential to running your business successfully.

So, when wondering ‘what is credit management?’ think of it as your company’s action plan to guard against late payments or defaults by your customers.

Effective credit management uses a continuous, proactive process of identifying risks, evaluating their potential for loss and strategically guarding against the inherent risks of extending credit.

While the specifics of successful credit management vary by business, most organisations work through these core steps:

1. Establish a credit policy

Before extending credit to any customer, your business needs a documented credit policy. This sets out who qualifies for credit, under what conditions, and what happens when payment terms are not met.

2. Assess customer creditworthiness

You should evaluate new customers before extending credit. This normally involves credit checks through credit reference agencies, a review of financial statements, requesting trade references, and assessing the customer's payment history with other suppliers.

3. Set credit limits and payment terms

Based on your creditworthiness assessment, assign a credit limit and agree payment terms. In the UK, standard B2B payment terms are usually 30 days. Be aware that the Late Payment of Commercial Debts (Interest) Act 1998 entitles UK businesses to charge statutory interest on overdue invoices, which can be useful to your credit management.

4. Issue accurate invoices promptly

Late or inaccurate invoices are one of the most common causes of delayed payment, so your invoices should be issued immediately upon delivery of goods or services. Make sure you include all the information needed and send it directly to the correct contact.

5. Monitor accounts and follow up early

If you constantly monitor your customer accounts, you will spot overdue payments before they become a problem. If you are proactive with follow-ups, before invoices become significantly overdue, this will reduce DSO and limit bad debt exposure.

6. Manage overdue accounts

If your business doesn’t receive payments on time, a structured collections process is the next step. This normally starts with reminder communications and escalates to formal collections procedures if the payment still doesn’t arrive.

Credit management and collections are closely related but not the same.

• Credit management is the broader process and covers everything from assessing customer creditworthiness and setting payment terms through to monitoring accounts and maintaining the customer relationship throughout the credit period.
• Collections refers specifically to the recovery of overdue payments. It is one part of the wider credit management process and usually triggered when standard payment terms have not been met.

The difference matters because effective credit management aims to prevent accounts from ever reaching the collections stage. If you have a well-designed credit policy, combined with proactive monitoring and clear communication, it will reduce the volume of overdue debt and there will be no need for formal collections.

One of the key benefits of credit management is the ability to see a clear picture of your company’s finances so you can avoid unnecessary credit risk and seize opportunities.

But that’s not all. Credit management benefits also include:

• Cash flow protection: ensuring that your cash inflows are always higher than your cash outflows so that you can pay your bills and employees on time.
• Reducing the number of late payments by detecting them earlier and preventing bad debts, consequently reducing the possibility that a default will adversely impact your business.
• Increasing available business liquidity.
• Executing faster and more complete debt recovery.
• Improving your company’s Days Sales Outstanding (DSO).
• Identifying opportunities and freeing up your company’s working capital for critical business investments that can support strategic growth.
• Helping you plan and analyse performance, which enables you to prepare financial budgets for the years to come.
• Reassuring potential lenders who can fund your business expansion plans.

B2B credit management carries a distinct set of challenges compared to consumer credit.

• Business-to-business transactions usually involve higher invoice values, longer payment terms, and more complex approval processes. A single large customer defaulting on payment can have a significant impact on cash flow, especially for small and medium-sized businesses.
• B2B credit management also sits within the broader order-to-cash (O2C) process, which is the end-to-end cycle from receiving a customer order through to collecting payment. Credit management is active at multiple points within O2C: during customer onboarding, throughout the invoicing cycle, and at the collections stage if payment is delayed.
• For companies trading internationally, business credit management becomes more complex still, with additional considerations around currency risk, country risk, and unfamiliar legal frameworks for international debt recovery.
   

Define your credit management process

First, take a close look at the credit management services and practices currently employed by your company:

• Who is in charge of managing credit: a team? An individual? Or busy executives who may not have the time to make accurate credit decisions?
• What are the rules in place linked to payment terms or your late payment process?
• If you don’t have a credit and debt management process in place yet, here are a few elements you can start with:
• Calculate your average Days Sales Outstanding or DSO (the average number of days it takes you to collect payment from customers) and compare it with that of your industry.
• Check if on average you are paying suppliers before payments are coming in. If so, you may need to adjust your billing cycle and payment terms.
• Maintain a healthy diversification in your customer portfolio so that you’re not relying on one big customer.

Your company should become familiar with credit risk management best practices, which include optimising contract management and accounts receivable collections, identifying and analysing the risk of new clients defaulting on payments and creating a proactive credit risk mitigation plan. You should define the actions you require in credit account management from other departments and make people accountable.

Finally, your credit management process should seek a healthy balance between avoiding risk and seizing opportunity. Being overly cautious can mean missing out on some sales opportunities while being too lax could cause you to miss the signs of a risky customer.

Establish client creditworthiness

Being proactive plays an important role in managing credit – in particular, understanding your clients’ financial picture.

New clients are a welcome addition to any business, but make sure they don’t become a liability: identify and analyse their risk of defaulting on payments by creating a proactive credit risk mitigation plan. This is an important step in credit and debt management.

Even existing customers should undergo a periodic review process. Just because you have a good relationship with a customer doesn’t mean they are impervious to default.

Chambers of Commerce and credit bureaus, bank and trade references, etc. can reveal a customer’s most up-to-date financial activities, as well as their cash flow status.

So, take a look at the customer’s specific industry and market and note the comparison with the economic performance of closely related industries.

Managing credit becomes more complex when conducting business with foreign customers because it can be difficult to interpret and understand information used by foreign countries to measure creditworthiness.

When assessing an international client, include country-specific credit risks, such as fluctuations in currency exchange rates, economic or political instability, the potential for trade sanctions or embargos, etc.

Overall, audited financial statements are the best way to understand a company’s financial picture, though some privately held customers may not be willing to share these with you. Allianz Trade trade credit insurance can help. Alongside protecting your trade receivables, it gives you access to your customers’ financial information and help you with credit and debt management.

Support credit and debt management with documentation

When establishing a contract with a customer, here are a few tips you should keep in mind:

• Ensure the contract includes your delivery and payment conditions and explains any provisions in the agreement, such as which conditions apply and are acceptable to you.
• Ask a lawyer to review the conditions upon entering into the contract.
• Clarify your clients’ payment procedures, policies and idiosyncrasies and identify to whom you should send your invoices and ask for acknowledgement of receipt.
• Invoice early, when work has been completed or services provided. Make sure that your invoice is addressed to the right contact person, company name and address so it can be treated promptly. Ask the recipient to acknowledge receipt of your invoice.

To maximise the chance your invoice will be paid on time, we recommend it include:

• Your company name, address, telephone number, email address, and contact name.
• The purchasing order reference.
• The nature and quantity of the goods or services.
• The price in the appropriate currency.
• The agreed-upon payment period.
• Your payment details.
• Your terms, printed on the back of the invoice.

Thanks to these simple credit and debt management tips, you should find a reduction in the probability of late or non-payments.

Monitor your clients’ payment progress

Despite all these measures, you can’t always guarantee your customers will pay their bills within the agreed-upon period. This is where your credit management policy and credit management services prove essential again. Monitoring your customers' payment progress to make sure they’re complying with your contract agreement can help avoid unpleasant surprises. Review each customer with a frequency that aligns with the perceived risk that the particular customer presents.

In the event of late payments, don’t call your lawyer immediately as it’s important to maintain good customer relations. Start by calling the customer yourself and follow up with a polite but firm written reminder that you are expecting payment within a reasonable time.

However, if an invoice remains unpaid after two or three months despite your reminders, consider turning to a professional debt collector, such as your trade credit insurer or a debt collection agency.

Nowadays, more businesses are using technology to support their credit management processes. This is often because manual credit management, like tracking invoices, chasing payments, and maintaining customer records across a large portfolio, is time-consuming and leaves room for error.

Accounts receivable (AR) automation platforms can:

1. Automate invoice delivery and payment reminders
2. Flag overdue accounts and trigger follow-up workflows automatically
3. Provide real-time visibility of outstanding debt and DSO performance
4. Integrate with credit reference agencies for automated creditworthiness checks
5. Generate dashboards for ongoing credit risk monitoring

For businesses with high invoice volumes, automation reduces the administrative burden on credit teams and allows them to focus on higher-value judgement calls.

Trade credit insurance is another solution that works alongside your credit management strategy and provides protection against the risk of customer insolvency or protracted default.
 

We know that a strong credit management strategy will take you a long way, but, unfortunately, no strategy can cover all risks. Trade credit insurance from Allianz Trade works with your existing processes to protect against bad debts. We give your business the confidence to extend credit and grow without fear of being caught out.

For further help, talk to one of our experts to find out how accounts receivable insurance can help protect your assets and keep your business moving forward.