How to cut credit risk in your business

When your company sells products to a customer and allows them to pay later, you are selling on credit. This benefits your customer, who gets to wait a month or more before paying your invoice. Credit sales terms vary, sometimes permitting customers 30, 60, 90 or even 120 days to pay after receiving the invoice.

You may think that keeping customers happy is good for business. And there is some truth in this notion. But you are also putting your company at risk, because your customer could fail to pay. If this happens, you will be out of pocket. You may struggle to pay your rent, meet your salary bill and buy the stock you need to fulfil new product orders. There will also be less cash to invest back into your business. Without working capital, how will you grow, win new accounts or improve the quality of your goods?

The risk that customers won’t pay is called credit risk. When not managed properly, this type of risk can be very bad for business.

Cutting credit risk

Keen to limit your exposure to credit risk? Here are three ways you can achieve this.

1. Do credit checks

Do you perform credit checks on all customers before agreeing to credit sales terms? Knowing your customer is the first step. Draft a clear credit application form that asks for:

  • Business contact details
  • Personal contact details for all owners and beneficial owners
  • Number of employees
  • Bank and trade payment references
  • A history of business or personal insolvency
  • Any other names under which the company operates

Then, verify all the details through a credit reporting agency.

2. Set credit terms

Your credit application should also specify what your credit terms are; and what happens when your customer fails to meet these. This may require some back and forth. Every company wants to hold onto its cash for as long as possible – and your customers may ask for credit sales terms that span months. Instead of agreeing at the drop of a hat, see if you can negotiate your customers down to 30 days or less. It may be easier than you think; and your cash flow will be much better for it!

3. Keep track of payments

You need to stay on top of your accounts receivable. If you do not have one yet, put a system in place that alerts you when payments are due. If your customers are late to pay, even by a day, send them a friendly reminder. If they still haven’t paid a week later, it’s worth giving them a call to see why they’re overdue. Get them to commit to a new payment date, in black and white.

But won’t this waste time and affect your customer relationships?

These steps can help you to reduce your credit risk. But you may be worried about how much time all this admin will take. You may also feel uneasy talking to clients about credit terms and overdue bills. One way to solve both these challenges is to pull in a professional. An expert partner like Merchant Factors can provide valuable support in these areas.

How Merchant Factors can help

Merchant Factors is a financial firm that specialises in working capital solutions that keep your cash flow healthy and help you to minimise credit risk.

Factoring is a type of business finance that allows you to draw cash back into your business before your customers pay your invoices. Merchant Factors pays you up to 75% of the value of these invoices. They then deal directly with your customers, collecting payments in line with your agreed credit sales terms. The balance will be settled as soon as your customer pays in full, minus an agreed admin fee.

To make your life even easier, Merchant Factors acts as your accounts and credit control department. This can save hours of your valuable time. The expert team handles everything from opening new debtors’ accounts and performing deep credit checks, to handling payments and more. All these services are carried out in close consultation with you as part of the factoring agreement.

For more information on fast, flexible business finance – contact Merchant Factors today

Finance beyond the Numbers.