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Managing credit risk in uncertain times

With ongoing supply chain disruptions, rising commodity prices and the increased threat of insolvencies in several key markets across the Asia-Pacific region, many businesses are facing difficult times ahead.

In an economic environment like this, businesses cannot assume that customers with a strong payment track record will still be able to meet their liabilities. For suppliers, periods of economic stress should be a catalyst to take a strategic look at your credit management process – for both new and existing customers. This is the time to review and refresh the management of your accounts receivables, taking the opportunity to identify problems early and to take steps to avoid nasty surprises.

To minimise trading risks, it is best to actively manage accounts on a continuous basis. But how should a business do that? Here we outline a best practice approach for businesses looking to improve their management of credit risk in difficult times.

Do your research

When it comes to assessing new clients, it is a good idea to implement a formal credit check procedure. This should include gathering information on a company’s financial position, industry performance and the outlook for the countries they operate in. Ideally you will also gain an insight into your prospect’s payments behaviour. Are they regular late payers?

The availability of financial information such as this will vary from market to market throughout the world. Some jurisdictions require businesses to publish financial information, others do not. In Asia, financial information can be difficult to source and verify.

This is where a reputable international trade credit insurer can be invaluable. In addition to providing credit risk mitigation products, a good credit insurance company will have access to financial information, including payments behaviour, of millions of businesses throughout the world. 

Once you are comfortable with the level of a prospect's credit risk the next step in your risk management process is to set appropriate payment terms. Here it is important for your sales teams and credit department to work in partnership. Trade credit can be an invaluable sales tool and may help your competitive position. However, it also exposes your company to the risk of non-payment. The longer the terms you offer, the greater the risk. Some businesses choose to start a relationship on cash payment terms only, with a view to extending credit once the relationship is established. Others may wish to extend credit from the outset. Individual markets and sectors may also have generally accepted average terms. You should assess your customer and level of risk before applying terms that are appropriate to your situation.

Monitor customer payment behaviour

Just like investment products warn that ‘past performance is not an indicator of future performance’, you should monitor your customers’ creditworthiness. Only by assessing a company, its industry and the countries in which it operates on a regular basis can you have an informed idea of their ability to meet payments. Ideally you should conduct credit risk assessments every month or every quarter as appropriate for your sector and market. (You can find out more about how to conduct a regular financial health check here.)

If a normally reliable customer starts paying late, it is a sign to monitor that company and ensure you have a thorough understanding of the credit risk. For example, if they are operating in a country where supply chains have been disrupted, or in an industry that has faced a drop in demand, this is likely to impact their ability to settle payments. (For tips on how to manage your accounts receivables click here.)

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Act before problems get too big

Once you have identified customers who are at risk of falling behind with payments, you should take action to minimise the risk of bad debts. This could include moving to cash or secured payment terms or – if you your customer is experiencing short-term cash flow issues and you are comfortable with their long-term credit profile – offering to extend the number of days by which they need to settle an invoice.

Periods of challenging economic and trading conditions are unavoidable for all businesses. As a supplier, the key is to have processes in place to spot potential problems and find a solution before it’s too late.

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