Top tips for avoiding credit risk
For many companies, extending credit to customers is standard practice. But just because it’s normal doesn’t mean it’s not risky – and to keep cash flowing, effective credit management is vital.
So what can you do to mitigate the risk of bad credit, and prevent time wastage through having to chase up payments?
Here are some tips to avoid unpaid credit:
Know your customers
They say that knowledge is power, and this is certainly true when it comes to credit management.
Learning everything you can about your customers can help you to fully understand the risks before you enter into any business dealings with them. It can also help you to recover money if their finances take a bad turn.
While asking questions is certainly a good way to start learning about your customers, they may not be all that truthful sometimes, especially when talking about money issues, so it’s your job to do further research as well.
Some things you can do include searching for news about the company online, reading reports from credit companies such as Graydon, Dun & Bradstreet f.e. and getting testimony from the customer’s other suppliers. You may also use the services of a professional credit checking agency.
Annual reports are another excellent source of information – but don’t just rely on the most recent one. Go back a few years in order to get a holistic view of the company and how it performs over time.
- Assess information carefully
Gathering data about a customer is only step one of the process. From there, you need to review the information provided, analyse trends and look beyond what it says on the surface.
Key indicators of financial health include sales trends, company profits, net worth and shareholders’ funds. Upward trends are usually a good sign, but also be sure to assess the extent of borrowing and firm’s working capital ratio. The latter determines a company’s liquidity and can provide an indication of whether the organisation will be able to meet short-term financial obligations.
- Try customer scoring
It helps to have a system in place when determining whether a customer can be given credit and how much. A scoring method can help you make better decisions, while also helping to improve productivity and reducing credit risk.
- Observe sector behaviours
Learning about your customers’ business sectors can also help you to better evaluate credit risk. Take some time to find out who the market leaders are, what type of growth prospects exist and what challenges are in the future.
Also, try to look down the supply chain a bit. After all, if somebody doesn’t pay your customer on time, it could lead to them not paying you on time either.
- Have the right tools
Credit management software like Onguard can simplify the entire process and help you to avoid credit risk. With Onguard, you can carry out credit checks, gather customer and sector information and generate reports that can help you determine risk levels. The software can also help with dunning, chasing payments, processing payments and many other tasks.
“Quality is when we achieve the customer’s expectation. But we are trying to create a service aptitude that we recognize opportunities to exceed the customer’s expectations.”