How businesses can overcome the potentially deadly impact of late or non-payments

When businesses become insolvent, it’s often because of late or non-payments from their customers and clients. CEOs need to take an active interest in preventing this from happening by being more aware of how the organisation manages credit risks.

Business leaders should be aware of the risks right from when a client comes on board. Credit checking customers can help protect cash flow and mitigate the risk of trading with unreliable partners. It can provide an insight into customers’ debtor management and credit control policies and offer an accurate understanding of the current trade risks. Issues that can affect credit limits need to be identified as soon as possible.

The size of a company doesn’t guarantee cash flow and even the largest of organisations can be a chronically-late payer. Businesses should credit-check all customers regardless of size or market position. Company credit checks give businesses a thorough understanding of their customers’ financial history and current status at all stages of the trade relationship.

Checking customer credit histories also lets businesses know if the potential customer has previously defaulted on payments, as well as how likely they are to repay debts on time or take on loans they can’t afford. Routine credit checking helps to ensure that the agreed trade settings are still appropriate for the customer.

If customers fail credit checks, the business should request a personal guarantee from a financially-sound director or shareholder to ensure that payments will be honoured.

When checking a potential customer’s credit risk, businesses should find out about whether the business trades on credit terms. If it does, then the business likely has substantial amounts of working capital tied up in accounts receivable, which can be risky if customers can’t or won’t pay on time. The flow-on effects can damage every organisation in the supply chain.

It is important to safeguard cash flow from bad debt, which can damage profitability and business-supplier relationships. Credit insurers will follow up bad debts on the business’s behalf and cover losses.

There are five key ways credit insurance can protect businesses’ cash flow:

1. Loss recovery

   Credit insurers can provide debt collection services. Organisations in Asia Pacific lose, on average, 50% of the total value of their trade receivables that aren’t paid within 90 days of the due date.

   There are many reasons a customer can’t pay on time or at all. Some reasons are beyond the customer’s control like political and natural disasters, but failing to collect these funds can damage cash flow. A credit insurance policy can cover for these losses and protect the cash flow.

2. Early warning

   Organisations with credit insurance can receive early warning of potential payment difficulties. Credit insurers can provide access to credit information on companies operating worldwide, and can evaluate the risks of working with new businesses so they can limit unnecessary trading risks.

3. Fit for purpose cover

   Credit insurance policies cover goods and services sold and delivered, and can be tailored to cover many risks, like work in progress and binding contracts. Credit insurers can provide flexible cover options that let organisations match the policy to the business requirements. The cost of this cover can be very affordable.

4. Enhanced credit management

   Credit management cannot guarantee bad debt prevention, but credit insurance enhances and strengthens credit management processes to protect cash flow.

5. Liquid funds

   Insufficient liquidity can stunt business growth. Credit insurers can provide liquid funds, increasing cash flow through the business. Businesses need the latest information to understand how well customers are responding to current market conditions.

   Credit insurers can provide online portals so that organisations can receive credit checks in real time and receive important information like when new directors come on board. This helps organisations maintain control, letting managers make quick, well-informed business decisions at all times.