One of the hallmarks of a successful business is its ability to adapt to changing circumstances. It is one thing for companies to thrive when the economy is growing and there is a stable Government but how will they fare when they are really tested?
When the tide turns, it is essential that business leaders are still able to look outwards and make the most of available opportunities. However, those with a limited credit management strategy can find themselves trapped in a holding pattern while their competitors forge ahead.
In fact, many businesses are already in survival mode. According to the Office for National Statistics latest figures, business investment fell by 1.1% in the third quarter of 2018, the third consecutive quarter-on-quarter fall. In December 2018, the IoD’s Confidence Tracker of more than 700 company directors reported that confidence was at its lowest level in over 18 months, with the outlook for investment particularly subdued. Meanwhile, UK productivity grew by just 0.2% in the three months to September 2018, the weakest growth since the third quarter of 2016 and way below the rate of other advanced economies.
Keeping options open
In this climate, companies with an inflexible approach to risk can find themselves in a self-imposed straitjacket: unable to offer competitive credit terms to secure new customers; reluctant to commit too much of their own working capital to new projects in case they are hit by a financial shock; and ultimately a relatively unattractive prospect for financial backers.
Every company is different, but here are a few questions to consider when assessing your credit management strategy and whether or not it offers you sufficient room for manoeuver.
Does your credit management strategy tie up your working capital?
Many companies choose to create their own financial cushion and self-insure against customer insolvency and other eventualities. While this avoids paying insurance premiums, the downside is that it ties up money which could be put to better use.
Is your strategy realistic?
The other drawback with self-insurance is the money that a business can afford to set aside may not be sufficient to cover potential losses. The failure of a major company within a sector can have huge implications for the whole supply chain. According to the Association of British Insurers (ABI) the collapse of Carillion in January 2018 resulted in credit insurers paying out a record £1 million a day to help UK firms stay afloat. The ABI also revealed that claims ranged from £5,000 to several million, almost certainly beyond the means of suppliers that chose to self-insure.
Does it represent good value for money?
Trade financing options, which include an element of insurance, provide a degree of certainty – but at a cost – so it is important to understand the financial outlay.
For example, companies can sell their invoices to a factoring service, which typically advances 80-90% of the value and assumes the non-payment risk. This accelerated payment means the company’s cash flow position is more stable which allows for better planning. However, in addition to a proportion of the invoice value, it will be necessary to pay a service charge.
Letters of credit can also be a useful credit management tool when trading internationally but banks will usually demand both security and a fee in return for this service.
Credit Insurance is invariably a more flexible and cost effective solution.
Does it do enough?
A credit management strategy should effectively mitigate the risks taken on by a business. While a letter of credit provides a level of protection, it only applies to international trade and is limited to one customer, which means a new letter is required for every new customer. Equally, the insurance offered by factoring services, provides protection in the event of customer insolvency but unlike credit insurance, there isn’t the option to cover other risks such as late payment, disputed debts, political risks, natural disaster or pre-shipment risks.
Does it support business growth?
Effective credit management should enable companies to trade from a position of strength. The credit risk and payment information held by credit insurers like Coface enables policy-holders to focus on the most profitable customers and steer clear of risky business. It’s also worth noting that having credit insurance in place makes a business financially secure and therefore more attractive to finance providers and investors – which can enable better borrowing terms.
Which strategy is right for you?
There is no one-size-fits-all approach to credit management – company decision-makers need to find an approach they feel comfortable with and which is appropriate for the risks they encounter in their market. However, the guiding principle of any strategy should be that it provides the freedom to not only trade with confidence but enables you to take advantage of new opportunities.
A world leader in credit insurance, Coface provides a range of credit management services that protect customers from the impact of bad debt, keep them fully informed about trade risk, recover their unpaid invoices and help them develop their business. For more information, visit www.cofaceitfirst.com