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5 best practice tips for credit checking and monitoring

Credit can be a powerful trade tool. Companies that offer B2B customer credit can often gain a competitive advantage over businesses that require cash up front. However, offering credit also means carrying the risk of non-payment. Businesses that protect their accounts receivable through credit insurance can help to mitigate this risk and even use it to build their business. Recent research by Atradius Australia has revealed that Atradius customers with credit insurance grew their businesses twice as fast as Australia’s average GDP.

In addition to employing credit insurance to mitigate risk, most successful businesses take a proactive approach to checking and monitoring their credit customers.

Top tips companies should consider when establishing a system of credit checking and monitoring include:

1. Ensure new customers are genuine

Before accepting orders from a new customer, you should run through a checklist of questions to highlight any anomalies. Things to be aware of include how long has the business been established? What is the legal form and does that really match the type/size of business you are being led to believe it is?

2. Regularly monitor your customers’ financial health

It is important to continuously monitor your customers’ payments behaviour, since conditions can change without warning. Ideally this should also include reviewing their financial accounts including debt levels, profits and cash flow. Other sources of information include the local Chamber of Commerce and third-party data providers.

3. Understand industry sectors and market risks

Detailed knowledge of the sectors and geographies in which your customers operate will help your company to conduct an accurate credit assessment. Industry performance and the economic outlook for markets depend on a number of factors including government policies, consumer sentiment and supply chain security.

 4. Maintain accurate data

When you keep customer data up-to-date in a central repository, you can improve clarity and decision-making between your credit management and sales teams, while also helping to prevent unauthorised changes. Having an accurate record of any special arrangements also allows your company to send invoices without errors, execute collections with the correct approach and manage disputes effectively.

5. Track payment behaviour

Keep your bookkeeping system up to date to ensure you know which customers are paying on time and which have failed to pay. This will enable you to gain a deeper understanding of key performance indicators such as days sales outstanding (DSO) and will provide you with the information you need to act quickly to chase outstanding debts. Tracking payments behaviour can also help you identify trends and may assist you in to spot a customer in financial difficulty before they enter insolvency.

Accessing professional credit management support

Many larger businesses operate with an in-house credit management department. However, for some smaller and medium-sized businesses, it can be a challenge to carry out effective credit assessments without diverting much-needed resources away from their primary business. This is where outsourced credit management support can be most effective. Many businesses leverage the strong credit management support that a trade credit insurance company can offer in addition to trade credit risk mitigation.

Benefitting from a credit insurer’s extensive resources

A reputable, international trade credit insurance company will have access to in-depth knowledge and resources. These include highly trained and experienced underwriters who are located on the ground, speak the customer’s language, have a sound grasp of local markets and regulatory requirements, while specialising in risk assessment.

Credit insurers also have access to a range of tools that aid the continuous monitoring of a client’s customer base. These include extensive databases containing information on millions of companies around the world, complete with buyer rating systems, allowing companies to balance risk and opportunity through informed decision-making. Such a system can help you avoid risk, allowing you to focus resources on growing the business with customers who pay their bills on time as well as exploring new markets.

Risk mitigation is just one area where a good credit insurer can support trade. Many successful businesses actively leverage the vast and detailed knowledge of their credit insurer to make significant and strategically important sales decisions.

Global trade credit insurers, with their broad footprint are capable of investigating a company first-hand, which is even more crucial in places where financial reports are not easily accessible. For instance, an advanced economy like Germany requires all companies, regardless of their size, to file their financial reports online, which are then available for easy access, and companies operate within the guardrails of a strong legal system. This, however, may not be the case in many countries in Asia – a key difference that will matter if you are trying to assess the creditworthiness of a new prospect, or if your company is trying to recover money from a customer or seeking redress in the event of fraud.

Moreover, when payments are overdue, a credit insurer will often help you with debt collection as part of your coverage.

Finally, a credit insurance company brings a degree of impartiality that enhances the effectiveness of the credit management process. An unbiased, unsentimental approach provides a realistic view of a customer’s standing in the market and its future prospects. This, in turn, may help your company avoid the hassle of bad debts and focus on building a robust client roster.

Would you like to know more about how implementing a credit check system can prevent a liquidity squeeze? Read this article.

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