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6 Tips to Reduce Trade Credit Risk

Nov 13, 2019

Much of your trade credit risk can be reduced by prudent credit practices. Here are some practical ways that you can evaluate your customers.

  1. Get someone other than the sales professional to communicate with the buyer about credit. It’s important not to cross the credit decisions with the sales efforts. Your buyers will understand.
  2. Process a real credit investigation. Require a signed credit application with two credit references, minimum. The cost of an independent third-party credit report is well worth it.  You can use it to confirm the information that you have gathered and learn about the company’s ownership, history of litigation, tax problems if any, etc.
  3. Be willing to ask tough questions. You are about to trust the buyer with your hard-earned money, so they should trust you with confidential information. Ask for a current set of financial statements and compare them with the other information that you have gathered. The financial statements should reflect what you have learned from other sources.
  4. Participate in your industry credit group. Networking with others in your industry is a great way to stay on top of current credit events.
  5. Work with United Risk Consultants to evaluate insuring your receivables. The credit insurance companies insure millions of buyers and have access to data that you probably do not have. A serious evaluation of the risk in your portfolio of accounts receivable may justify the modest cost of insurance. Outsourcing credit evaluation, monitoring and collection services to the insurance company is frequently a big value added.
  6. Should you choose to manage every part of the credit function in house, please establish firm rules. The customer that you trust the most might ask you to do things that you should not do.  A lack of discipline can bring on problems.

Conclusion

Keep clear records of the terms of sale and proof that the goods or services were delivered. That will eliminate many excuses.

When asked for special payment terms, or unusual arrangements, you should be flexible but also very careful to keep written records of the transaction.