Performing a customer credit check is often viewed as a costly activity. But whether your buyer is a new or longstanding customer, it’s essential to make sure trading decisions are based on credit risk and not just personal relationships. As has become evident in recent months, even the biggest companies have found themselves under financial distress due to the coronavirus pandemic. Virgin Australia, Canadian shoe retailer ALDO Group and Hong Kong - headquartered clothing manufacturer Esprit are among names that have filed for financial protection or bankruptcy in recent months.
Given the tougher trading conditions, it’s important to be aware of your buyers’ credit risk to avoid a rise in bad debts. Things to consider include the outlook for the industry in which they operate. For example, the airline and tourism industries have been badly impacted by the coronavirus and will take a long time to recover. More generally, industry performance and the economic outlook for markets depend on a number of factors including government policies, consumer sentiment and supply chain security, all of which can affect your company’s sales and cash flow.
Of course, it can be a difficult and time-consuming process to collect and maintain this information, especially when a customer operates in a different market to you. Companies that have insurance for their trade receivables are able to draw on the resources of a trade insurance specialist to get a detailed risk assessment on their customers including insights on the sectors and countries in which they operate.
There are changes in customer behaviour that could suggest a buyer is in financial difficulty. Things to look out for include:
If you notice a buyer is taking longer to settle invoices than is typical, e.g. paying after 60 days rather than the normal 45, use this as an opportunity to ask if there are any problems. The delay may be due to the challenges of working under social distancing arrangements, but it could also signal that there are liquidity issues.
Be aware if a buyer regularly asks for a payment extension. When trading conditions are difficult, payments from their customers may be delayed which has a knock-on effect on their ability to pay suppliers.
Buyers tend to purchase a similar amount of goods in each order, so if there is a sudden increase of order, it’s important to understand the reasons behind this. Be curious about the sudden surge of order to gain insights into the reason behind and the end buyers of these orders.
If you do become concerned about the financial position of one of your customers, it’s important to initiate a conversation to see how you can support them and at the same time reduce the risk of bad debts. For example, by offering a discount or suspending interest or late fees in return for a prompt payment. At the same time, take steps to trade with that customer in a way that provides extra security, such as taking out credit insurance to provide protection in the case of non-payment and using letters of credit. If your customer does fail to pay their bill, it is worth hiring a debt collections agency to help recover the payment.
Winning new customers and maintaining long-term relationships with existing buyers is important to the success of a company. However, only by understanding the credit risks of your customers and adjusting your trading practices to reflect that risk, can you protect your business and your customers.
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