Customer credit approval process flowchart (limit and terms)
Customer credit approval process flowchart: application and entity checks, bureau report and trade references, scoring, the delegated authority ladder, security, the ERP limit, and periodic review.
How it works
Rename the lanes to your own roles
Replace Customer, Sales, Credit analyst, Credit manager and Finance director with the roles you actually have. In a small finance team the analyst and manager are one person, so merge the lanes rather than leaving one empty; in a shared service centre the analysis sits offshore and the decision stays local, which is exactly the hand-off worth keeping visible. Whatever you merge, keep the person who prepares the case separate from the person who approves it, because that separation is the first thing an auditor or an insurer will look for.
Write the authority ladder as figures
"Within delegated authority?" is inert until you attach numbers. Set a limit for each tier against a role rather than a named person, name a deputy for each so the ladder does not stall over a holiday, and state the currency. Most importantly, define what the figure is measured against: total exposure, meaning the posted ledger balance plus open orders plus delivered but unbilled work, rather than the order in front of you. Add the cases that escalate whatever the value, such as a brand-new entity, an overseas customer or a customer previously placed on stop.
Define what a complete application is
Decide what the pack behind "Application pack complete?" has to contain before an analyst starts work: the registered entity name and company number, the group parent, the delivery sites and the invoicing entity, the limit and payment terms requested with a figure attached, the expected monthly value, two trade references, and consent for the checks you intend to run. Anything left optional will be blank, and the analyst will fill the gap with an assumption. Say who chases, how many times, and when a stalled application is closed rather than left open.
State the evidence and how it is weighted
"Score and propose a limit and terms" should be reproducible by a second analyst from the same file. Write down which bureau you use and what each score band means for you, how the limit is derived from turnover, net worth or expected monthly purchase, and how internal payment history overrides the external view on an existing customer. Say what an analyst may do when the evidence is thin, which is usually a small starting limit with an early review rather than a refusal, and require the reasoning to be recorded with the proposal.
Decide what security means in practice
"Specify the security required" needs a menu with owners. Name the instruments you accept — parent or director guarantee, deposit or part prepayment, letter of credit, credit insurance, retention of title — and for each one say who drafts it, who checks the signatory is authorised, where the original is held and who watches the expiry date. Note the limitation on each: a guarantee is only as good as the guarantor's balance sheet, and an insurer can cut its cover at short notice, which quietly reduces your own limit.
Set the review triggers, then walk it through and publish it
Attach a cadence to each risk tier on "Review due or trigger hit?" and list the events that pull a review forward: a missed payment, a broken payment plan, a bureau score drop, a court judgment, a limit increase request, a change of ownership, accounts filed late, an account gone quiet. Then walk the whole chart through with an analyst, the credit manager and a salesperson, using two real customers including one that was declined, correct it to what they actually do, and publish that version so people can tell which one they are reading.
Frequently asked questions
What are the steps in a customer credit approval process?
A workable sequence is: the customer asks for credit terms, sales records the limit and terms being requested, and the application pack is checked for completeness and chased if there are gaps. The legal entity and its ownership are verified and screened, and a screening hit stops the case on compliance grounds rather than being treated as a credit question. A credit analyst then obtains the bureau report, reviews filed accounts and trade references, and scores the customer to propose a limit and payment terms. The proposal is tested against the delegated authority ladder and referred up a tier if it is above the limit, then decided three ways: approve as requested, approve with security such as a guarantee, deposit, letter of credit or credit insurance, or decline with a prepayment alternative. An approved limit is loaded on the customer master in the ERP, and the account is then monitored, reviewed on a cadence or on a trigger, and reduced, held or withdrawn if the position deteriorates.
How do you set a customer credit limit?
There are four common methods and most credit teams use two of them together. The first is a proportion of the customer's net worth or working capital taken from filed accounts, which suits established companies. The second works back from trade: the expected monthly purchase value multiplied by the payment terms expressed in months, plus a margin for the days customers actually take beyond those terms. The third is the recommended limit produced by a bureau, which is useful as a sanity check but is calculated for a general creditor rather than for your exposure specifically. The fourth, for an existing customer, is their own payment history and highest cleared balance, which beats anything external. Whichever you use, apply the limit to total exposure rather than the ledger balance alone, and start a new customer low with an early review instead of arguing about a large figure on thin evidence.
How is this different from the accounts receivable process?
They meet at the invoice and share almost nothing else. Customer credit approval, the process on this page, decides whether a customer may owe you money at all, how much, on what terms and against what security, using identity checks, a bureau report, filed accounts and references, and an authority ladder. It ends when the limit is live on the customer master and under review. The accounts receivable process at /templates/accounts-receivable-process starts once an invoice exists: raising and issuing it, tracking it against terms, the dunning ladder, disputes and credit notes, payment plans, collections and bad-debt write-off. If your problem is that overdue invoices are not chased consistently, that is the page you want. If your problem is that the limit was never right, or was never enforced, this is the one. Both sit inside the wider order-to-cash process at /templates/order-to-cash-process, where credit approval is a single box that this chart expands.
What security can you ask for when a customer fails a credit check?
A failed check is rarely the end of the conversation, which is why this chart has an approve-with-security branch. The usual options are a parent company or director guarantee, a deposit or part prepayment, a letter of credit or bank guarantee, trade credit insurance, and retention of title in the contract terms. Each has a limitation worth writing down. A guarantee is only worth the guarantor's own balance sheet and must be signed by somebody authorised to give it. A deposit is the cleanest but the hardest sell. A letter of credit is well suited to export orders and is expensive for the customer. Credit insurance covers a share of a loss subject to the insurer's own limit on that buyer, and insurers withdraw cover when they see deterioration, sometimes before you do. Whatever you accept, check it is actually in place before releasing the limit, and monitor its expiry.
How often should customer credit limits be reviewed?
Set the cadence by exposure rather than reviewing everybody annually because that is what the policy says. A common pattern is quarterly for the largest limits and anything on a watch list, semi-annually for the middle band, and annually for the long tail, with a light automated bureau monitoring alert covering everyone in between. The scheduled review is not what protects you, though: the event triggers are. Name them explicitly and act on them the day they arrive — a missed payment or a broken payment plan, a fall in the bureau score, a court judgment, an insurer reducing cover, a request to increase the limit, a change of ownership, accounts filed late or not at all, and an account that has stopped ordering without explanation. In this chart those triggers and the calendar feed the same decision, so a limit is never reviewed only because a date passed. One thing a review is not is the route to a bigger limit: an increase request goes back through the authority ladder, because a larger exposure needs the tier entitled to sign it.