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Five Tips for Managing Credit Risk

Five Tips for Managing Credit Risk

2018 saw a spate of high-profile insolvencies and behind the headlines were a lot of smaller suppliers that were affected by company collapses like Maplin or Toys ‘R’ Us. In insolvency cases the average return for an unsecured creditor is between five and ten per cent.

Red Flag Alert is the perfect partner to identify these risks because it provides a clear score on the financial health of a business and gives you an important insight into any clients that are in financial distress before it’s too late.

In this article we’re going to take a look at five practical steps you can take if a key client is experiencing financial difficulties.

Step One – Find Other Clients

This sounds obvious, but is a critical step. Many businesses have a well-established client book that they’ve serviced successfully for years, but over time business development has slowed as they concentrate on delivering value to current customers.

Some businesses are exposed to a large amount of risk because they only have a few key clients (or even just one) that supply the majority of their revenue.

This strategy can work for many years, but if a key client becomes insolvent it can ruin a business. Looking for new clients, over time, reduces that risk.

If clients can be found in alternative sectors, that’s even better. For example, if a maintenance contractor has mainly hotel clients it makes sense to consider clients in other sectors like commercial property or universities. This will protect against the hotel sector doing poorly, resulting in a loss of revenue from that area.

Step Two – Improve Margins

If a client becomes a credit risk then it makes sense to mitigate this by increasing your margin with them by either raising prices or decreasing costs.

While this may not always be possible, it should be explored. It doesn’t have to be a drastic move like ramping up all prices.

Perhaps you are giving the client some preferential rates or waiving delivery fees; these account privileges can be withdrawn.

If you use Red Flag Alert and a client has two red flags, then there is a very real possibility of insolvency within 12 months and your business taking a financial hit.

You may decide to be brutal and upfront or subtle and courteous, but the bottom line is that the client is exposing you to risk and you need to mitigate it by generating more short-term profits.

Step Three – Tighten Your Terms

A key tactic is to make sure the agreement you have with a client is as favourable as possible. This may mean:

  • Shorter payment terms
  • Payment upfront
  • Just-in-time stock delivery
  • Retention of Title clauses

Of course, these tactics need to be weighed against the need to maintain a good business relationship.

Step Four – Credit Insurance

Depending on the level of risk you’re exposed to, credit insurance may be a viable option. Credit insurance allows you to receive a payout if a debtor is no longer able to pay.

Understandably, credit insurers will analyse the financial health of your customers before offering you a policy.

It’s worth getting a range of quotes and the level of cover will vary dramatically depending on your client base. It is a sensible mitigating step for any business, especially those that rely on a few key customers.

Step Five – Optimise VAT Payments

If your business is currently paying VAT on an accrual basis it may be worth considering making this a cash basis.

This allows you to pay VAT when you receive cash rather than when you raise an invoice. Although VAT is recoverable on bad debts it can take time to receive the cash back.

It’s worth investigating if you qualify for the VAT cash accounting scheme and considering joining if the chances of bad debt are increased.

The downside of cash accounting is that you are paying VAT in arrears so you may run into cash flow problems by not setting aside enough cash to make the quarterly payments.

Red Flag Alert – The Perfect Partner to Manage Risk

If your clients are experiencing financial distress you need to know.

Businesses are devastated every day because of bad debt and Red Flag Alert allows you to see problems early.

  • Financial health on every UK business.
  • 50,000 real-time updates every day.
  • Detailed rating system that is predictive of future problems.
  • Sophisticated scorecards that include a wide range of weighted factors.
  • Information integrated into your CRM.
  • Monitoring updates provided in real time.

Using Red Flag Alert gives you the vital early-warning system that will prompt pre-emptive action and can make your credit control processes proactive.

To find out how Red Flag Alert can reduce risk in your business, please get in touch with Richard West on richard.west@redflagalert.com or 0344 412 6699.

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