Top tips to avoid credit risk
For many companies, extending credit to customers is standard practice. But just because it’s common practice doesn’t mean it’s not risky. Additionally, to keep a constant cash flow, 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 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 about your customers can help you fully understand the risks before you enter into business 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 always disclose the whole truth. This is especially true when talking about financial issues, so it is your job to do further research. Some approaches 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 processes. From there, you need to review the information provided, analyse trends and read between the lines to find the true nature of their credit history. Key indicators of financial health include sales trends, company profits, net worth, and shareholders’ funds. Upward trends are usually a good sign, but be sure to assess the extent of borrowing and the 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 future challenges. 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. Our software can also help with dunning, chasing payments, processing payments and many other tasks.