Credit Management

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What is credit management?

Some exporters offer credit to gain a competitive advantage in their market. Balancing the potential for increased sales with the risk of reduced cash flow is an important part of managing risk. Credit Management is an approach consisting of multiple techniques to assure that buyers pay on time, credit costs are kept low, and poor debts are managed in such a manner that payment is received without damaging the relationship with that buyer.

Credit assessment

The ability of the buyer to meet its obligations begins with the analysis of the borrower’s financial statements. Commonly used measures of liquidity and debt coverage combined with estimates of future cash flows are calculated and investigated if there are concerns. In addition, the analysis considers industry trends, the buyer’s basic operating and competitive position, sources of liquidity (backup lines of credit), and, if applicable, the regulatory environment. An investigation of industry trends aids a credit analyst in assessing the vulnerability of the firm to economic cycles, the barriers to entry, and the exposure of the company to technological changes. An investigation of the buyer’s various lines of business aids the credit analyst in assessing the firm’s basic operating position.

Warning signals

Exporters should pay close attention to warning signs and take prompt counter measures as needed. Risk signals can be any of the following: over stocking, excessive debt, continuous losses, heavy involvement in litigation cases, frequent changes in shareholders, delay in submittingfinancial statements, putting off payments, requests for longer credit periods, sudden change in payment terms and requests for extending due dates. Once payment difficulty is detected, exporters should act promptly to minimise losses. Actions should include negotiation with buyers for solutions or repayment schedules.

Debt recovery

Payment defaults are unavoidable in real businesses. Exporters should formulate their own debt collection workflows based on their specific situations, industry practices, resources available and other relevant factors. In general, there are two main types of commercial debt collections, namely internal collections and third party collections.

Internal collection is usually adopted at the early stage of buyerdefaults. Exporters should find out the reasons for default by checking the buyers’ financial status and the presence of any disputes. Exporters are advised to resort to various communication channels including telephone calls, letters and email to show their concerns about the receivables.

If the problem is beyond the capacity of internal resources while some warning signals recur, exporters may have to turn to third party collectors or lawyers for assistance. Third party collection can assist exporters in adopting suitable andeffective measures, showing the determination in debt recovery throughthe escalation of actions. Finally, exporters should thoroughly evaluate factors such as costs, arguments in hand and debtors’ repayment abilitybefore pursuing legal actions.

Alternatives to providing credit

Exporters may find it necessary to reject credit in some cases. Rather than risk losing the client, alternative payment methods may be used while establishes a trading history with the client. Review the client's situation after a specified volume of trade, number of orders, or period of time.

The alternative methods may include:

  • requesting cash on delivery (COD) for new clients until a trading history is established;
  • collecting a deposit before making a supply to cover costs of materials and overheads, and as an indication of their ability and intention to pay;
  • collecting progress payments that are linked to achieving major milestones. Progress payments are common in the construction and building industry;
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