Credit Management - Does It Really Matter to Your Business?

Did you know - a leading trade credit insurer estimated that one in five SME bankruptcies occur due to their customers defaulting on invoices? Could your credit management practices be impacting your own creditworthiness in the market negatively?

While the term “credit management” is widely used in conversation, many professionals do not truly understand what this critical business function involves in practice. Some believe it is useful only to big corporate organisations. So what does it really entail?

In essence, credit management involves the whole system of strategies and policies implemented by a business in extending credit facilities to customers while minimizing potential risks – a non-negotiable function for every business, large and small. This includes creating a robust credit policy that outlines procedures for evaluating customers’ creditworthiness, diligent credit assessment, assigning appropriate credit terms, monitoring payment behavior, as well as ensuring compliance with applicable regulations and industry standards. To be truly effective, these processes must be proactive and tailored to the business’ own needs.

Your business’ creditworthiness and survival depend on the credit policies you choose to implement. Small & medium businesses can be more directly impacted by defaulting customers due to the scale of business and dependence on inflow of cash for sustaining operations.

Most businesses focus on increasing their market share, but do not really analyse the risk of payment default these new customers bring along with them. Proper due diligence allows you to estimate and prepare for such risks rather than being caught off guard in the event that they do not pay their dues. Efficient credit management practices also increase your business’ eligibility for options including trade credit insurance, allowing them to gain added support for mitigating credit risks.

While it is not possible to avoid all exposure to risk, with reasonable, effective credit management strategies backed by sufficient information, you can ensure your customers’ delinquency does not drag your business down with them.?