5 Steps To Help SMEs Manage Credit Risk

July 26, 2021Cash Flow , Late Payments

5 Crucial Steps to Assist SMEs Manage Credit Risk

In industries, such as wholesale and distribution, credit is seen as a necessity when doing business. Credit offers you a way to sell more to your customers and grow faster.

However, sending out goods before receiving payment has it’s risks. It leaves you open to late payments, and in some cases, no payment at all.

While this can significantly affect your short-term cash flow, it can also affect your business growth and bottom-line in the long run.

For suppliers, building the right credit management system is key for your survival.

 

The Risks

Not having a system in place leads to risks, which include;

  1. Reduced cash flow: Increasing payment times can affect your cash flow and the ability to buy the materials or products needed for your business.
  2. Low-profit margins
  3. Growing debts

 

Key Steps to an Effective credit management strategy:

 

1: Create a solid credit policy

You need to have a credit policy that outlines your;

Objectives; Describe your credit policy’s purpose and include a definition of businesses and customers that you plan to extend credit to as well as your credit terms.

Work out how much credit you can safely extend to your customers and under what conditions the credit will be offered.

Determine your risk before setting up your credit terms.

And credit limits: Set appropriate limits for different customer types.

For example, new customers can be given a smaller credit limit to start with.

Once they prove to be a good payer, new limits can be implemented for good payers and COD can be an option for those who continuously pay late.

 

2: Do Your Research

The next step of your process should include a credit check.

Assessing your customers credit score and history will give you an indication of whether they’re a good payer or not. This information is vital if you are determining if you should extend credit to them and how much you should be willing to offer.

 

3: Get it in writing

You’ll need to collect credit references, information on partners, owners, directors and have a signed agreement on file. Use an online credit application process to make this set easy for your customers. This won’t just give your new customers a great experience but also collect everything you need.

 

4: Monitor your trade customers:

Your customer’s situation can change in a blink of an eye. It is essential that you constantly keep an eye on who you are trading with.

Performing a periodically scheduled credit check can help you identify how your customers are tracking.

 

5: Insurance:

Obtaining trade credit insurance protects your accounts receivables and helps you reduce your risks of non-payment by your customers.

Insurance can recover up to 90% of your lost funds so this can definitely keep you out of trouble.

 

The Human Connection

Other than all these steps, a human-to-human connection with your customers makes a world of difference. Building trust and a great relationship is a massive help
Building trust with your customers is a huge factor to being paid on time.

People like to help out the ones they get along with the most. By building great relationships you’re your customers, you’ll add another net of safety to your business.

For some pointers to building better business relationships; check out this article that we have written to help you out. 

Check it out here:
How to build better business relationships.