Australian SMEs have done a great job of navigating the economic challenges of the past few years. With the continued skills shortage and a possible downturn on the horizon, small businesses still need to keep an eye on their cashflow. Here are some ways SMEs can protect themselves from credit risk and ensure they’re always paid on time.
What is credit risk?
Credit risk is the possibility of a loss that results from failing to repay a loan or meet your financial obligations. Usually, credit risk refers to the risk a bank or financial institution takes on when lending. However, SMEs are affected by credit risk too. Here are some steps SMEs can take to minimize the amount of money owed to their business.
Learn to identify high-risk clients or businesses
Working with high-risk clients or businesses can have financial implications for SMEs. If a client is experiencing financial hardships, this can have a flow-on effect to your business. Learning the signs of a high-risk business can help you avoid working with clients who may struggle to pay invoices on time or fail to honour your agreed payment terms.
Before choosing a new supplier, logistic operator or service provider, do some background research into their financial history. Business credit checks can give you a useful insight into the history of the business you are working with. A company’s credit score will also give you insight into how well the company is run and whether they have a history of failing to make payments on time.
The size of the company has nothing to do with how quickly you’ll get paid. Large companies often take longer and have more red tape around their processes than SMEs.
Take a cautious approach to working with new clients
As well as doing your due diligence before you take on a new client, SMEs can keep themselves protected by taking a cautionary approach to working with new clients. Don’t extend payment terms with new clients until they have established a track record of paying on time.
Another way SMEs can keep themselves protected is to bill new clients at regular increments rather than charging one single payment. Milestone payments can be difficult for SMEs as they keep you waiting on large sums of cash.
If your business keeps accounts with customers, reduce the payment terms for new customers. Or better yet, charge upfront for new customers. Sometimes all it takes is one or two customers failing to pay their bills on time to cause problems to your cash flow. Asking for payment before work begins, or reducing payment terms, will help keep the money flowing.
Don’t assume your current clients will always pay on time
It’s easy to think that established business relationships will always run smoothly. However, insolvency or bankruptcy can happen to any type of business new or established. Don’t treat credit risk management as a one-off process that is only reserved for onboarding new customers. Evaluate your credit risk with clients regularly. This way you can adjust your processes if you notice any signs of financial trouble with existing clients.
Offer alternative payment options
There may be times when clients you trusted just can’t pay their invoices on time. While it’s frustrating, these clients usually aren’t acting in bad faith. Rather than severing the relationship or aggressively chasing funds, setting up alternative payment options can help you recover the money you’re owed and leave your business relationship intact. Whether you want to continue working with these clients after you’ve been paid is up to you.
Stay on top of your accounts
Knowledge is power. Keep on top of your accounts, establish proper processes for invoicing and defaults moving to collections. By making a habit of reviewing your accounts (incomings and outgoings), you’ll be able to spot any financial red flags early and offer support to customers that need it or are more likely to be first in line when it comes to collections. You’re also less likely to be blindsided by large accounts not being paid on time.
Take out an invoice finance loan
If you are already experiencing credit risk, applying for a business loan can help. Invoice finance helps to bridge the gap between invoicing your customers and receiving payment. Invoice finance helps to protect your reputation and will ensure you can still pay your debts on time, even if your clients aren’t paying on time.
Need invoice financing now? Apply for an unsecured loan today.
