The Basics of Business Credit Risk Management

Business Credit Risk ManagementYour current and prospective customers expect credit terms and your competitors are surely offering it, so it leaves you little choice in the matter. Selling products and services to customers on credit is a risk, but with the nature of today’s businesses it’s a necessary one. The secret to success is learning how the ins and outs of business credit risk management.

What is credit risk?

Credit risk is the risk that a borrower (a customer) will fail to make the required payments based on the agreed upon terms. The risk is primarily that of the lender (the company) and includes lost principal and interest, disruption of cash flows, and increased collection costs. There is a lot that goes into credit risk, and many companies, especially small or medium sized businesses, really don’t know how to manage it.

What is credit risk management?

Business credit risk management is the lenders primary line of defense to protect themselves against customers who fail to pay back the credit that was extended to them. Credit risk identification and management is important to ensure that a lender does not take on more risk than they can handle or afford if the borrower fails to pay.

Why bother with credit management?

We all know this to be true, the longer an invoice goes unpaid, the less likely it is that the invoice will ever be paid in full…or at all. If you’re like the average company, you’re accounts receivable situation probably looks something like this:

  • 39% of invoices are paid late
  • 17% of customers do not adhere to credit terms
  • 48% of customers delay payments
  • 52% of businesses ask for extended payment terms
  • Average days sales outstanding (61 days) is more than 2X the payment terms (28 days)
  • source: PayStream Advisors RCM report

By implementing risk management best practices and proven tools to help you identify and reduce credit risk, you can change those numbers, and start putting your accounts receivable assets to work.

While you may be aware of traditional business credit risk management strategies, this white paper will teach you basic and advanced credit management best practices and how you can make better, faster decisions about extending credit to customers with modern tactics and tools you may not yet be aware of.

business credit risk

 

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