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Managing credit risk in difficult times

When an economic downturn hits, suppliers can no longer assume that buyers with a strong payment track record will still be able to meet their liabilities.

To minimise the risks, you need to actively manage accounts on a continuous basis. It remains crucial to manage shifting buyer relationships and credit risk in difficult times.

From disrupted supply chains to weaker global demand, companies face multiple obstacles to conducting trade around Asia and the globe. For suppliers, periods of economic stress should be a catalyst to take a strategic look at your credit management process – for both new and existing customers – as well as the management of your accounts receivables so you can identify problems early and avoid negative surprises.

Do your research

When it comes to assessing new clients, we recommend implementing a formal credit check procedure that includes gathering information on a company’s financial position, industry performance and the outlook for the countries they operate in.

A trade credit insurance company can support your efforts by drawing on their expertise including in-country specialists. The best ones will also have a proprietary database of companies which includes information on whether a buyer has a history of late payment or default. Access to this type of data is particularly important in Asia where information can be difficult to source and verify.

Once you are comfortable with a buyer’s credit risk and want to onboard them as a customer, setting appropriate payment terms is an important step in the risk management process. Offering trade credit is a recognised way of helping companies grow their business. However, companies may vary on their approach for new buyers. For example, you may want to start by offering cash payment only for the first couple of months to establish a relationship. Alternatively you can offer credit terms immediately if your company feels comfortable with the credit risk once it has carried out an assessment.

Monitor customer payment behavior

Even for established clients, it is important to have a formal credit assessment policy in place. It can be likened to the warning on investment products, that ‘past performance is not an indicator of future performance’. This concept should also be applied to buyer relationships, especially when trading conditions are tough. Only by assessing a company, its industry and the countries in which it operates on a regular basis can you have an informed idea of their ability to meet payments. (You can find out more about how to conduct a regular financial health check here) In addition to conducting regular credit risk assessment, companies should as a minimum, monitor their account receivables monthly as they can serve as an early warning indicator. For long-term customers, you will have a payment history so if normally reliable companies start paying late, it is a sign to monitor that company and ensure you have a thorough understanding of the credit risk. For example, if they are operating in a country where supply chains have been disrupted or in an industry that has faced a drop in demand, this is likely to impact their ability to settle payments. (For tips on how to manage your accounts receivables click here)

Act before problems get too big

Once you have identified customers who are at risk of falling behind with payments, as a supplier you want to take action to minimise the chance of bad debts. These could include moving to cash or secured payment terms or – if you are comfortable with a customer’s long-term credit profile – offering to extend the number of days by which they need to settle an invoice. For businesses, periods of weaker economic conditions are unavoidable. As a supplier, the key is to have processes in place to spot potential problems and provide a solution before it’s too late.

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