How can small business owners manage credit risk?

Posted by: Centrix
Category: Business, News

By digging in and banding together, Kiwis have done a great job navigating COVID-19, with our current way of life the envy of countries across the world. Of course, the small business economy will be increasingly keeping a close eye on their cashflow as the economic impact of the pandemic starts to make itself felt.

We know many small business owners are concerned about 2021, but there are steps you can be taking to help position yourself to survive the anticipated downturn.

One of the most critical is managing and minimising your commercial credit risk. That is, the overall amount of money owed to you by people or businesses who you are trusting to honour agreed payment terms.

With the right credit strategy in place, and knowing the red flags to look out for, you will be in a much better position to not only survive, but thrive, in the current business environment.

Learn the signs of a high-risk business

When you are in business, you need to be able to work effectively with other businesses. Whether it is your suppliers, logististics operators or service providers, you need the support of others.

Checking the finanical history of potential partner businesses is an important tool to help you minimise a major source of credit risk.

For example, if  looking at a potential business customer, check out their credit rating. This gives you the insights you need to make better estimations about their likelihood of meeting future repayments.

Whether it changes your mind about working with them, or simply influences how you budget for potential payment delays, arming yourself with the information in a commercial credit report allows you to better manage your cashflow.

Credit checking can also give you useful insights into the history of a business. The Company credit score will give you a good insight into the risk involved. In addition a long history of on-time payments should provide confidence of a well run organisation that has good systems and processes in place.

On the other hand, a history of missed payments, court actions and insolvency notices should set-off alarm bells and caution is recommended.

You do not want to compromise your business by extending high levels of credit to a company that is likely to be in trouble. Doing a business credit check is a simple soluton that can be achieved with  downloading a one-off Commercial credit report via the Centrix website.

Recognise and support at-risk customers

Of course, for many businesses, credit risk will not come from their business customers, but from individuals, especially in tougher economic times.

For some businesses, having just a few customers failing to pay their bills on time can have a devastating impact. Doing a simple credit check helps reduce this risk and you’ll be able to assess the likelihood of repayments being made.

Nevertheless, every customer you extend credit to presents at least some risk, and you’ll inevitably find yourself needing to manage payment defaults.

Having a good relationship with your customers is important and can be mutually beneficial. Offering support and alternative payment options to help customers through difficult times isn’t just a good moral decision, it makes sense from a business perspective. After all, receiving payment, even if it takes longer than desired, should remain the goal.

There are a range of tools available to help you do this like setting up alerts to send notifications when a customer’s financial situation changes, providing an early warning of a potential issue.

Make use of tools and technology to monitor risk

The adage ‘Knowledge is Power’ is relevant in all walks of life.

And with the tools now at our disposal, business owners can have access an enormous amount of data to provide them with the insights they need to make smarter credit decisions.

But you need to make use of this data to realise its benefit.

You need to be making a habit of reviewing touchpoints regularly to spot at-risk accounts early, offering support where needed to avoid defaults and, when necessary, moving to collections quickly so you’re first in the queue for repayment.

Good accounting platforms can give you up-to-date, accurate financial readings of your business, while Centrix’s Portfolio HealthCheck compares your portfolio against a wide range of key indicators and datasets – giving you a broad picture of your portfolio performance and risk status.

Remember, maintaining a healthy, reliable portfolio will keep the money flowing in.

You can manage risk – not eliminate it

The reality is credit risk is an inherent part of operating a business, but there are things you can do to reduce your risk.

Adopting the right checks and balances, making a concerted effort to understand the information at your disposal and seeking expert advice, will all help you make informed business decisions.

By Monika Lacey, GM Sales and Marketing, Centrix