Rising credit risks warning

Ratings agency Moody’s has given a stark warning that the UK should anticipate a rise in credit risks given the prospect of an unwinding of the level of Government fiscal support measures.

It adds that weak earnings and solvency concerns will weigh hard on hard-hit companies, while higher debt levels will erode the positive effects of low interest rates on debt-servicing capacity.

The latest report from R3, the insolvency and restructuring trade body, shows that corporate insolvencies are on the rise again, increasing by 37.8% to 1,228 in December 2020 compared to November’s figure of 1,125.

Late payments and how to protect your business 

Late payments are a sign that a customer may have a problem and for many they become accepted as another operating cost. Big businesses incorporate automation, prediction, advanced analytics, and artificial intelligence into their management tools to identify the risk.  

However, we appreciate many SMEs will be relying on looking at the debtor ledger to identify late payers, and may not be looking at their industry, trends and other signals that indicate business creditworthiness. 

So, what are the tools at your disposal?

·       Get to know the customer. Understand the business sector, risk level and what credit terms have been offered.

·       Manage cash flow. Review payment schedules with key customers. Potentially agree price discounts with large firms in an effort to reduce their 60/90-day credit terms to achieve better cashflow despite discounting.

·       Invoice correctly and promptly. Dating invoices on the first day of the month can often turn a 30-day invoice into 60 days. Understanding how a customer pays and bill them accordingly. Maintain customer documentation and ensure the details are correct. If a customer has a vendor portal, login, and check invoice status frequently.

·       Chase payment regularly. Chasing payment helps keep your business front of mind and build relationships with accounts payable teams. When they get to know a vendor, accounts payable staff can be empathetic, helpful, and loyal when they know how a business operates.

·       Outsource debt collection. Invoice financing or factoring is an option if a business doesn’t have internal resource, but it can be costly. 

·       Get Trade Credit Insurance. This type of policy provides cover for businesses if customers who owe money for products or services do not pay their debt or pay them later than payment terms. This could be caused by customer bankruptcy, political risk, or other reasons. It gives businesses the confidence to extend credit to new customers and improves access to funding. There will be a number of trade credit options to suit businesses and customers. Trade credit insurers review and report on risk by business sector right down to individual customer level.