Manage Credit risk
Being on Top of Your Game
From time to time even the best-run companies have problems with late payments or defaults - it's a fact of business life. To make sure you're able to take advantage of the opportunities associated with extending credit, consider these ways to protect your company from financial loss:
Know Your Customer
One of the most effective ways to minimize credit risk is to monitor changes in your customers' business circumstances by updating customer profiles on a regular basis. A reliable credit information provider is an excellent source of almost all the information you need to keep tabs on buyers so you can be prepared if an issue arises.
As Usual, Time is Money
Studies have shown that to increase your chances of collecting your money, start early!
For each month a payment is past due, the odds of getting paid decrease by 10%. So after 60 days, the chance of recovery is 80%; after 90 days this declines to 70%, and so on.
Watch for Red Flags
Be aware of a customer's deteriorating creditworthiness. The number one indicator is late or non-payment - a situation you should take seriously. Remember, the older a receivable, the less chance you have of collecting it.
Take notice when a customer:
- Stops buying from you.
- Frequently suggests changes in payment schedules.
- Makes only partial payments.
- Dramatically alters his ordering pattern.
- Frequently says the cheque is in the mail.
- Cannot be reached.
Accounts Receivable Insurance
Accounts receivable insurance protects you against loss of revenue due to non-payment. Depending on the policy, you may be able to recover up to 90% of the invoice amount. Insurance is particularly valuable if you do a lot of business with U.S. or overseas customers because collecting outside Canada can be complicated and expensive. Look at your loss experience, number of foreign customers and the price of coverage - then decide if accounts receivable insurance makes sense for you.
Learn from Competitors
Survey your industry to help you decide where to place your company on the credit continuum. What terms do your competitors offer? Can you afford to offer the same terms? Can you use your credit policy as a differentiator and do better? Do competitors accept cheques, credit cards and/or letters of credit? You can get general information from trade associations, bankers, accountants and credit information agencies, as well as competitor advertisements.
Best Practices in Credit Risk Management
Adopting these credit risk management best practices will help nip potential problems in the bud:
- Set up a procedure for the regular monitoring of customer profiles.
- Obtain up-to-date customer data from a reputable credit information agency.
- Periodically review the terms of your credit policy. You may want to be more conservative if the economy is experiencing a rough patch.
- Always have a customer fill out a credit application; if the risk is unacceptable, deny credit.
- Clearly stipulate payment terms on invoices.
- Get a down payment if you agree to an installment plan.
- If you accept personal cheques, require two pieces of identification.
Best Practices in Debt Collection
When you do run into a problem, these debt collection best practices can help maximize your recoveries:
- Follow your established credit policy.
- Be polite and respectful but firm.
- Don't argue with your customers.
- Don't suggest an action you won't carry out.
- If the customer is having a temporary problem, offer to work out a payment plan.
- When appropriate, engage a mediator.
- Take legal action only as a last resort.
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