Cashflow Covered
Credit Risk Management

How to protect your business if you work on credit terms

February 17, 2022 | 4 minutes

Offering your goods and services to other businesses on credit terms is a great way to expand your client base and grow your business. Many businesses prefer to work on buy now, pay later terms as it gives them time to resell or recoup the costs before needing to pay.

The problem arises when, even after the agreed payment date has come and gone, you are still waiting for payment from your client, and this problem is affecting 60% (3 out of 5) of small and medium businesses in the United Kingdom (Barclays Research).

If you plan on working with your clients on a credit basis, prevention is better than cure.

Credit Check Potential Clients

Get to know your customers before offering credit terms

As a consumer in the UK, whenever you are looking to get a new phone contract, buy a car, or apply for a mortgage, you know that the company you are applying to will run a credit check on you to determine the level of risk you pose to them as a customer.

As a business dealing with clients who are other businesses, it might not be as obvious to credit check your clients before offering them credit payment terms. Credit checking all customers before you work with them should become second nature, allowing you to see whether you should offer this client credit terms or not. After all, if you approach you bank for a business credit card or overdraft, the first thing they are going to do is run a credit check to see if you fit within their risk appetite.

Set Appropriate Credit Limits

Find out whether your customers are struggling to keep up with payments

Again, this is not as widely used in business-to-business (B2B) trading as it is in business to consumer (B2C) trading, and really this should change. With the example above on how your bank will credit check your business before they offer you credit, they will also set an appropriate limit to that credit.

As a B2B provider, you should be setting credit limits that are in-line with the products or services you offer and ensure that the credit limit is in-line with the risk profile of the customer that you are offering the limit to.

Continually Monitor your Debtors Book

Find out about potential late payments before they happen

You have run your credit check and set an appropriate credit limit, but you are still in a pickle when it comes to your cashflow. This could be because you are not continually monitoring your debtor book.

Credit ratings and credit scores are living datasets that continually change based on the behaviour of the person or company who it belongs to. Therefore, it is imperative to continue to monitor their credit profile, even after you have set agreed credit terms.

A change in the risk profile of the client should lead to a change in the credit limit that you offer them. For businesses who are working hard to increase their credit rating and see a positive increase in their rating can potentially be offered a larger credit line. Inversely to that, clients who have a negative decrease in their credit rating should have their payment terms and credit limits revisited, as the decrease in the rating could be a sign of their own cashflow issues.

Good cashflow management starts right at the beginning of business relationships, and therefore getting started with having the right practises and behaviours in place, can lead to long term business success.

Risk management is not just a one-time process, but rather a long-term pattern of behaviours that are geared towards lowering the risk of your business not getting paid.

At Satago we are working to build a platform that gets businesses paid, and part of our core offering is our Risk Insights solution. This solution takes the 3 parts of credit risk management above and combines them into a simple dashboard that gives insight into your existing customer base and allows you to make informed decisions when working with business clients on credit.

Satago offers a 2-week free trial of our all-in-one cashflow management suite, that will allow you to setup and start using intelligent risk management principles. Register for your 2-week trial here.

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