How to Slash Your Credit Exposure

The downturn gives companies an excuse for demanding that customers share more financial information, to keep on top of clients' ability to pay and stay viable.

The distinction between dependable and unreliable customers keeps getting blurrier.

Corporate clients that are paying you on time may in fact be financially unstable and — without your knowledge — could be delaying payments to other trade creditors. At the same time, some customers may be withholding their payments, not because they’re in dire straits, but out of fear that their banks will pull credit lines or not lend to them in the near future.

Indeed, some companies want their suppliers to practically fill in as bankers, by extending payment terms and giving their working capital some wiggle room. “Customers are asking their vendors to provide cash flow for them,” says David Beckel, president of the National Association of Credit Management. “This is a very tricky situation, because if you have somebody who was paying you every 30 days now paying every 60 days, your credit exposure is going to double. You have to evaluate if you want to take that kind of risk.”

It’s never been an easy task. But especially now, say trade-credit experts, companies need to get a better handle on their corporate customers’ ability to pay. Nearly one-quarter of publicly traded businesses worldwide are at risk of defaulting on their debt, according to Kamakura Corp.’s most recent index of “troubled” public companies, those whose default probability exceeds 1 percent. During the past 17 months, the risk-management firm’s monthly barometer of 21,000 public companies in 30 countries has been creeping closer to the September 2001 all-time high of 28 percent.

What’s less-known is how many private companies are at risk of defaulting on their promises to creditors. They tend to keep their vendors in the dark about even basic financial information, say trade-credit observers. Their suppliers are sometimes stuck relying on only basic bank information.

Of course, the rising number of hurting companies isn’t news to accounts-receivables departments that have been well aware of their corporate clients’ slipping ability to pay for several months. But there have been some surprises: Now, even customers once considered to be “excellent payers” are taking an extra month or more to pay their bills, credit managers recently told NACM.

In fact, the trade group’s latest monthly barometer of its members hit a record low of 40.1 in December. The survey asks 800 credit managers to rate favorable and unfavorable factors in their business cycle — unfavorable factors include rejections of credit applications, dollar collections, and amount of credit extended. All those factors declined between December 2007 and December 2008.

Problem is, suppliers — and especially small businesses — need to tread carefully before pressing clients to pay up. Every company wants to keep their most valuable customers and not lose them to disagreements or hurt feelings over payment terms. “The vendor-customer relationship is very, very close, and it’s very emotional,” says John Pontin, senior vice president and national sales director at trade-credit insurer Euler Hermes ACI.

However, no company wants to get burned by being too nice and seeing old invoices pile up or payments seized after a customer goes belly up. Trade-credit experts say that by the time you notice a customer is on the brink of insolvency, it’s unlikely you’ll get all the money that’s due to you. But, by being on top of your riskiest customers, you can minimize the damage to your receivables.

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