Effective communication ensures your business can identify, estimate, mitigate, and respond to credit risks in a timely and informed manner.
This article addresses common challenges between credit and commercial teams and how to establish clear and consistent credit policies that align the interests of both teams.
Topics to Discuss:
Communication challenges between credit and commercial teams
What are key elements to clear communication?
How to deliver a difficult message?
Communication Challenges
Credit is a role where communication is often between internal and external parties. A typical day can include contacting accounting, scheduling, commercial teams, and presenting to senior management, as well as contacting counterparties for additional information around their business operations and financial statements. As a result, both hard and soft skills are needed to excel as a credit professional.
Key soft skills include communication, both verbal and written, collaboration, having a teamwork mindset, and conflict resolution, the ability to address and resolve conflict in a constructive manner.
These soft skills come into play when facing common communication challenges, which include:
Knowledge Gap: Sales professionals may not have a deep understanding of credit risk and may underestimate the potential financial impact of not optimizing risk and reward.
Conflicting Objectives: The sales team is focused on closing deals and generating revenue. Credit teams should acknowledge the same, plus an emphasis on protecting capital.
Credit Policies: Inconsistent credit policies stall the credit review process, leading to unclear approval standards, delay's in decision-making, and disputes over risk tolerance.
Now that the challenges are laid out, how can teams bridge the gap?
Keys Elements to Effective Communication
Without communication and collaboration, no credit risk assessment can be considered complete. Part of becoming an effective communicator requires making sure stakeholders feel comfortable coming to you with information and ideas.
Here are best practices for communicating credit risk:
Use clear and simple language - Avoid technical jargon and complex financial terms. Use language that can be easily understood by individuals who many not have a background in finance or credit analysis.
Provide context and background information - Offer a brief overview of the credit request, counterparty background, transaction, or market conditions to help your audience grasp the broader picture.
Connect business impact - Demonstrate the impact of credit risk on financial performance. Use data and analytics to quantify the potential consequences of credit related issues, such as expected credit losses. This helps stakeholders understand the effects of credit risk on the organization bottom line.
Highlight key risks and key strengths - Focus on the most relevant aspects that impact your counterparty's creditworthiness. Illustrate how these factors contribute to the overall credit risk profile. Communicate not only the risks, but also the strengths. Highlighting all risks is not feasible or practical. Do not try to address every risk. We recommend the key risks and key strengths should be no more than 4 each.
Provide recommendations - Offer actionable insights and recommendations. Instead of presenting challenges without solutions, propose actions that align with organizational goals. Your recommendation and rationale to increase, decrease, initiate, or maintain a loan or credit line should be clearly stated.
Provide regular updates - Maintain a regular communication cadence with stakeholders. Provide updates on changes in creditworthiness, credit risk of largest exposures, and riskiest counterparties. Regular communications fosters transparency and confidence.
Document and share credit policies - Ensure credit policies and procedures are straightforward, simple to digest, and easily accessible. Do all involved parties know your companies risk appetite? What is considered "risky" to one person might not seem "risky" to another. Clearly defined credit review standards, risk thresholds and approval authorities establish expectations and responsibilities.
Ask for feedback - Encourage questions and feedback from your audience. Create an open communication environment where stakeholders feel comfortable expressing their concerns or seeking clarification. Ask questions such as "What are your thoughts?", "Do you see an challenges with this?", and "What is the alternative?"
By using these best practices, a credit team will improve communication and ensure credit risk management is seen as a vital part of the organization's overall strategy, contributing to its long term success.
How to delivery a difficult message
There will be times where counterparty credit deteriorates, industry dynamics shifts, or your company's strategic goals shift. When one of these occur, it is likely you will need to delivery messages that counterparties may not like, and this can lead to conflict.
Suggested steps and considerations for delivering a difficult message:
Prepare - Before initiating the conversation, review the credit risk assessment and gather supporting data. Confirm you have the specific issues contribution to the credit risk concerns. Focus on the main drivers of counterparty risk, typically no more than 3 specific reasons.
Choose the right time and setting - Opt for a private and quiet setting to discuss sensitive matters. This will allow for a focused conversation without the risk of interruptions or distractions. If remote, encourage cameras to be turned on.
Be specific and factual - Clearly articulate the specific reasons for the concerns about the counterparty's credit risk. Use factual information and avoid making subjective or emotional statements. Avoid stopping at "we think your credit risk is increasing". Instead, approach the situation with questions that encourage the counterparty to talk about their business, such as "What factors have influenced any changes in revenue trends?", "How would you describe your cash flow situation?", "Do you see any significant changes to your balance sheet composition?", and "What are the main drivers of your financial performance?".
Link to external factors - If applicable, discuss external factors contributing to the credit risk, such as industry trends, regulations, or economic conditions. This helps the counterparty understand that the assessment is not solely based on their individual performance.
Offer solutions and alternatives - Instead of presenting the credit risk assessment as the final verdict, offer constructive solutions and alternatives. Collaboratively explore ways to mitigate risks, such as modifying payment terms, providing additional collateral, or implementing risk-sharing arrangements.
Follow up in writing - After the conversation, follow up in writing with a summary of the key points discussed, the agreed-upon action plan, and any timelines for reassessment. This documentation helps provide clarity and provides a reference for future discussions.
Approaching the conversation with empathy, clarity, and a solution-focused mindset enables your credit team to effectively convey difficult messages about a counterparty's credit risk.
Final Thoughts
Credit teams are responsible for not only identifying and estimating credit risk, but also communicating counterparty credit risk.
Effective communication ensures all stakeholders understand counterparty credit risk, aligns team on your company's risk appetite, and fosters trust.
See how CreditKernel facilitates conversations and builds a risk aware culture.