Six Key Steps For SMEs To Manage Credit Risk

Six Key Steps For SMEs To Manage Credit Risk


Offering credit to your customers is an effective way of encouraging them to spend more on buying your products or services. In some industries such as wholesale, trade, or distribution – credit might be a requirement for doing business. Extending credit to your B2B customers could also help your business gain a distinct competitive advantage in your market.

While providing credit is good for your business growth, it exposes you to the risks of late payment and at times, non-payment. While this significantly impacts your short-term cash flow, it can also hurt your bottom-line and business growth in the long run. While some business owners may think they are not offering credit, they may already be doing so by sending an invoice after the goods or services are provided to the customers.

Balancing the risks of cash flow reduction and increased sales is the key to robust credit management.

The key risks of poor credit management include:

  • Reduced cash flow: The increase in payment times could impact cash flow and the ability to buy replacement products or raw materials from suppliers is impacted. Many businesses look into debtor finance to manage this risk.
  • Low-profit margin: Credit sales and poor credit risk management can also impact profit margins.
  • Growing debts: Reduced cash flow increases the burden of debts that pose a major risk for the business. Large single transactions are more prone to debt risks – it makes it imperative that your business enforces a consistent accounts receivables process – ideally through automation.

If you offer any other invoice terms not based on cash on delivery, it creates a risk that the customers may fail to pay on time or fail to pay altogether. For instance, if you offer 30-day terms, it translates to credit of 30 days. If that timeframe extends to 45 days or 90 days, the credit gets further extended and increases non-payment risk.

However, with some customers who have a strong and long history of making full payments on time, the credit risk may not be significant. Despite this, there is a risk, even if slight, that your next invoice may not get paid due to a change in the customer’s circumstances or other factors (You can track these in real-time with Credit Insights from ezyCollect). Although these external factors may not be under customer’s control, the outcome is that their inability to pay on time affects your cash flow and eventually, your bottom line.

The first step towards effective credit risk management is understanding your business’s overall credit risk. This helps businesses reduce losses and build up capital reserves. It is crucial to implement a smart, integrated, and informed credit risk management strategy.

The key elements of an effective credit management strategy:

  • Create a credit policy
    • The first step is to develop a strong credit policy that outlines your:
      • Objectives: Describe the purpose of the credit policy that can include the definition of businesses and customers that you plan to extend credit to as well as the terms. Determine how much credit you can safely extend and under what circumstances the credit will be offered. Determine the level of risk that your business can tolerate before setting down the terms.
      • Credit approval process: List the steps on transacting with new debtors such as assessing creditworthiness.
      • Credit limits: Define the elements that contribute to the credit limit of each customer. For instance, all new customers can qualify for a specific limit until the determined number of invoices are paid by them on time. You can also set the limits based on the customer’s risk rating.
  • Assess debtors
  • Monitor debtors
    • As conditions and circumstances can change at any time without warning, it is vital that you monitor your debtors constantly. While obtaining your customers’ approval for performing a credit check periodically, determine from time to time whether they still qualify for credit. If their rating has declined, implement your credit risk management action plan as determined in the first step.
  • Customer relationship management
    • Utilize a feature-rich CRM (Customer relationship management) tool to get timely alerts and payment reminders while ensuring seamless communication with your debtors.
  • Insurance
    • Trade credit insurance protects account receivables and helps cut the risk of non-payment. You can protect your cash flow as the insurance covers up to 90% of the amount due. However, there are limitations to using credit insurance – because it’s a bit like locking the stable after the horse has bolted. A better approach would be to use credit scores and trade insights when you onboard a new customer.

Building trust is the most critical factor when extending credit to another business or customer. While it is always a great idea to start with ‘cash sales’ with a new customer, you can navigate towards credit offerings when the customer has built a strong payment history and inspires the desired level of trust.

The complete guide to managing and preventing bad debts in B2B

The complete guide to managing and preventing bad debts in B2B

There are three key drivers of growth in a business- product, sales, and cash collection; however, the third one rarely receives the attention it deserves. Businesses often focus on sales/marketing and product – while taking cash collection as a given. The success of many B2B companies depends on their ability to manage the receivables collection function efficiently. And this is a function that deserves more attention, investment, and, dare we say, credit than it usually gets.

When you sell a product or perform service on credit, you are also in the B2B accounts receivables collection business. The financial health of your company depends on how well your business can collect on sales. Unfortunately, it is often performed with inadequate forethought to the systems, staff, strategy, and tactics to deliver exceptional results. And businesses find that their customers are using them as a bank, with many overdue invoices impacting the cash flow and growth prospects of the company.

Here we will look at how it is possible to increase your company’s cash flow performance with better planning, execution, and technology

What causes bad debt issues for business?

Credit, or rather the lack of credit-risk strategies, can often lead to bad B2B business debts. The problems can intensify with the lack of efficient operating models and insufficient management focus.

Lack of credit risk strategies

Many businesses do not implement a robust framework for credit-risk assessment. They do not follow the global best practices that reduce customer delinquency and debt collection. Not accounting for credit risk can lead to unhealthy business growth. It expands the customer base but depresses the profitability.

Companies with a credit risk framework often do not monitor pre-delinquency or follow the same approach for each bad debt. These companies seem to follow the same settlement strategies for all delinquents instead of adopting a customized approach for each such customer.

Lack of specialized staff for debt collection

Most companies do not have a specialized debt collection team, and they mostly rely on external agencies for the same. Some outsource this job to call-center agents who lack proper training to assess a customer’s situation. These agents, thus, fail to provide the right settlement options to these customers.

When the responsibility for collections lies between multiple departments, it is difficult to establish clear ownership of credit risk. Often, such companies lack staff that specializes in credit and risk management.

Lack of management focus

Top executives seem to be more occupied by transformation, innovation, and digitization that accounts receivables & collection is usually not in the spotlight. Bad debt figures don’t often feature on the agenda, making it harder to improve the situation.

How does bad debt, when left unchecked, impact a business?

Bad debts are never good for a business. They affect company finances as well as the accounting process. Bad debts often complicate the accounting process making it difficult to comprehend when a sale was completed. Accounting for an unpaid sale requires a variety of collection and reporting procedures.

Preventing bad debts is essential not just for the company’s financial health but also to minimize reputation and relationship risks from the collection process.

How can one manage bad debts effectively?

Debt management is vital to a business as it ensures that the company has enough working capital to reinvest and grow. Effectively managing debt requires some thought and planning and can be controlled with these simple steps.

Implement a credit policy

Most businesses have an informal arrangement for supplying goods and services. Not having clear, written terms of trade can lead to several disputes creating bad debts.

B2B companies require a firm credit policy to ensure their continued growth. Before offering credit to new customers, companies should conduct a thorough credit history and business reference check. Document the terms of business and the credit limits, and initiate business only when your customers understand, accept, and sign the business terms. 

Implementing new payment terms and conditions is better done with new customers or those looking to extend their credit limit. Introducing new terms to existing customers could upset them and affect their loyalty.

Avoid pricing disputes

Customers are more likely to pay you on time when you provide them with the right information on documents and invoices. Disputes can create bad debts that can significantly impact the business.

All your documents- quotations, invoices, contracts, purchase orders, and estimates should refer to your terms and credit policy. Make sure that the invoices and financial statements clearly show the amount due and the due date. The company’s billing address and bank account details should also be present on such documents.

It is a good idea to check with the customer if they need any additional information to expedite the payment. Indicating collection charges for overdue accounts on your invoices and statements can discourage late payments.

Use credit management software solutions

Well-maintained information is the key to good debt management. There are many credit management software solutions available in the market that can ease your company’s debt management process. These software solutions can closely monitor your debtors’ ledger and keep track of the outstanding payments. These solutions also offer regular reporting to help identify trends and patterns before they can impact your business’ cash flow.

Provide multiple payment options

One of the simplest hacks for getting paid outstanding invoices paid quickly is to add a multitude of payment options (credit card, bank transfer, cheques) – from a ‘Pay Now’ button on your invoice to enabling debt financing solutions – where you customers can get the outstanding invoices financed and pay you while they manage the repayments. The simple philosophy is to provide no excuses for your customers to not pay you – something which we adopt here at ezyCollect as well.

Implement AR automation

Accounts Receivables automation modernizes the accounts receivables process through automatic, electronic systems that decrease repetitive and time-consuming tasks. It frees up time for your accounts receivables team to chase payment and get the cash in to mitigate bad debts, rather than wasting time on printing and posting invoices.

AR automation improves the accuracy of invoicing details, leaving little to no room for an excuse for late payments. The AR team gets more time to chase payments and handle exceptions making collections fast with less delinquency. 

Strengthen your delivery systems and implement the practice of keeping signed dockets as proof of delivery. When you automate the AR process, it becomes possible to send invoices ahead of time, discouraging customers from making late payments. It can also send automatic reminders when customers deviate from your trade terms.

Review credit limits of your customers

Review the credit limits of your customers regularly. Look out for warning signals which could indicate that they may be facing financial problems. Check on all customers, even the long-standing ones, to monitor changes in buying habits or an increasing level of debt.

Wherever possible, refrain from doing business only with one substantial customer. Customer concentration risks outweigh the benefits. Be careful of customers who are expanding rapidly as their business growth can sometimes affect their ability to pay. Do exercise caution when handling requests for extending credit.

Stop supplying to customers who do not pay their accounts on time. Initiate a discussion about the situation and try and reach a settlement for payment of past supplies.

Importance of onboarding new customers with comprehensive credit checks

The core of a sound onboarding practice is to ensure that potential clients can pay for your goods or services. Implementing complete business credit checks allows you to access a client’s payment history, giving you useful information about their ability to pay, now and in the future. When you know a client’s potential payment pattern, you can make an informed decision if and how you would like to conduct business with that customer. The existing process of getting trade references and having your customers and sales teams fill out forms isn’t the most effective one – you might consider investing in a service or resource that can complete comprehensive business credit checks for you rapidly and help you transact with the right customers for your business

When you have insight into how a potential client manages financial responsibilities, you can make amendments to your payment terms and credit limits. Customizing payment terms for different customers helps safeguard your business from unreliable clients and cuts down the risk of bad debts. For instance, if a credit check indicates that a potential customer is a payment risk, you may front-load the payment terms or not offer credit at all.

Credit checks can be invaluable to mitigating risks and protecting your business from potentially expensive mistakes.

In Summary

B2B businesses face several challenges when collecting outstanding payments from delinquent customers. Developing a well-structured process, leveraging digitization, and upgrading your teams’ resources and capabilities can maximize recoveries and prevent bad debts. With an increased focus on debt management, companies can reduce high costs and lost income and enhance customer focus, customer engagement, resilience, and profits.

What is a business credit score and other FAQs

What is a business credit score and other FAQs

You are likely aware of the personal credit score as a measure of a person’s ability to repay a loan. Correspondingly, the business credit score is a measure of a company’s credit health, hence their capability to repay loans. When a company needs to borrow money, a creditor will assess the condition of the company’s credit status before issuing terms.

Key points

  • The business credit score is derived from the business’ credit profile in the marketplace.
  • Commercial credit reporting bureaus assess a business’ creditworthiness using sophisticated scoring models.
  • Creditors look at credit scores to evaluate a business’ likelihood of paying its invoices on time.
  • Credit scores summarise more detailed credit information available in a business credit report.

What is a business credit score?

business credit score is a number (or numbers) that signifies the business’ creditworthiness. A business credit score is based on data from its commercial credit file, which contains financial information. This number tells creditors how likely a company will pay its invoices on time.

A business credit score is a numeric indicator amalgamated from detailed information available in the business credit report.

Why do I need to know a business’ credit score?

Suppose you offer your customers trade credit as part of your payment terms. In that case, you’ll want to know upfront their credit health, i.e. the probability that your customer will repay you on time. A business credit score provided by a credit bureau will give you a credit evaluation based on combined market data.

It is common for most suppliers to solely seek trade references (i.e. testimonials from other suppliers about the buyer’s payment behavior) as credit assessment information. However, the risk with relying on trade references is that you’ll only get a snapshot of healthy relationships. But what about the bigger picture?

The business credit score takes out the personal bias and presents you with data-driven analysis.

Get business credit scores with ezyCollect

What does the business credit score mean?

There can be many interpretations of a business credit score as different credit reporting bureaus present the business credit score in different ways. At ezyCollect, we offer the data from the top credit reporting bureau, illion. illion’s credit scoring model provides two credit scores: a late payment risk score and a failure risk score. By providing these data, you get a clearer picture of the business risks from your customers.

Example of illion Late Payment Risk Score and Failure Risk Score


illion’s late payment risk score predicts the likelihood of a company paying severely late (90+ days beyond terms  in the next 12 months. The score range is 101- 799, where 101 represents the highest risk and 799 represents the lowest risk of delinquent payment.

Illion’s failure risk score predicts the likelihood that a business will seek legal relief from its creditors or cease operations leaving unpaid debts in the next 12 months. The score range is 1001-1999, where 1001 represents the highest risk and 1999 represents the lowest risk of delinquent payment.

What influences the business credit score?

The data used in the statistical analysis of business credit scores are mined from the credit bureau’s commercial database. Every bureau has its own credit score algorithm to calculate a credit score.

Key influencing factors in the illion business credit scores predicting late payment risk and business failure risk include:

  • Trade payment information (e.g. records of payments with vendors)
  • Collections data (e.g. debt collection notices against a company)
  • Company demographic information (e.g. industry type)
  • Director information (e.g. address and date of birth)
  • Public record information (e.g. court records, business status records)

Company financial information also influences business failure risk scores, such as financial records lodged with the corporate regulator. 

What is a good business credit score?

Each credit reporting bureau presents the business credit score differently and offers a range from minimal risk to severe risk rating. Generally, the higher the credit score, the healthier the credit rating.

As a general rule of thumb, suppliers give credit to companies with a moderate to minimal credit risk score. They then keep reviewing and monitoring the terms. As a customer’s credit score improves (average to minimal risk), suppliers may extend terms to foster a healthy buyer relationship.

Good payment behavior is an integral part of credit risk assessment. Paying creditors on time is the best thing that buyers can do to build a good business credit score.

What is a business credit report?

A credit reporting bureau puts together your business credit report based on your company’s past and current credit activity. They consider things like loans and other borrowings and your repayment history on bills such as water and electricity. The corporate regulator also provides information on business compliance and company financial data. The courts provide information on any court actions and judgements.

The business credit report can be basic or comprehensive. A basic credit report includes details on the business and its officeholders, legal events that occurred in the past 60 months and court actions related to directors.

A comprehensive business credit report, on the other hand, provides you with more information: historical ASIC data, Personal Property Securities Register (PPSR) and industry average risk scores.

How to improve a business credit score?

Pay bills on time

Past payment behavior is a crucial influence on the business credit score, so a business must pay its bills on time. Late payments on credit cards, utilities and supplier bills can negatively impact the business credit report and score.

Lower the credit utilization rate

Lenders would much rather see that a company has plenty of available credit rather than that it has maxed out its credit. This means a business should pay off its credit card balances on time, increase its credit limit so the utilization ratio is lower, or decrease its credit card spending.

Establish trade accounts

A business credit score can improve when positive trade references are attached to its credit file. Positive payment experiences are evidence of a business’ creditworthiness.

Correct errors on the business credit report

A business can erase errors on the credit report by providing the bureau with up-to-date and accurate information. To start, a business can check its credit report with any major credit reporting bureaus. Some services will offer one free check each year; otherwise, there is usually a fee.

The final word

Suppliers use business credit reports and scores to assess if a potential customer will likely pay their invoices on time. They may do business with high-risk customers by accepting only cash on delivery while offering low-risk customers extended credit limits and longer payment times.

Get illion business credit scores and reports immediately with ezyCollect’s Credit Insights service