Approximately 17% of small and medium-sized businesses have between $100,000 and $250,000 worth of debt. While this money is often spent on business-related expenses (such as equipment), it could include money owed to other companies.
Before you lend money to another business, it's essential to assess their liability. This will minimize the complications you experience.
We've put together a brief guide full of financial tips you can use to improve your credit risk management process. Let's explore the key information you need to know.
Running a business credit report is one of the most straightforward ways to assess someone's overall risk. This will provide insight into how the business in question compares to similar companies in the same industry. In the report, you'll receive data that outlines whether they underperform or present a financial risk.
Using business credit reports will minimize manual research, allowing you to save time. Keep in mind that new companies with low scores aren't always unreliable.
The less time they've been in the industry, the fewer opportunities they've had to prove their creditworthiness. A full business credit report will include info like:
These aren't the only factors to consider, though. Treat them as supplementary data alongside other information before you make your decision.
Examine the company's buying behavior, revenue stability, and supplier stability. The way a business spends its money often dictates its future performance.
If it lacks stability in multiple areas, this could be a sign of financial decline. Companies with multiple revenue streams are often less risky.
This is due to the fact they can supplement their revenue through alternative methods if one revenue stream underperforms. Companies with strong customer bases also tend to be reliable.
When assessing business stability, you should also consider if they've recently closed locations. Companies rarely close locations without experiencing financial distress.
Some industries are inherently riskier than others. For example, hackers often prioritize businesses in the healthcare, finance, and tech spaces.
Certain industries are also more sensitive to fluctuations in economic performance. Extending too much credit to risky companies could lead to financial strain.
It's worth noting that a company in a risky industry can still be financially reliable. For instance, imagine a financial firm that has a strong client base and multiple locations. Even though the financial industry carries an above-average level of risk, this particular company could easily repay debts.
It's recommended to diversify your client portfolio to minimize business credit risk. You can achieve this by working with clients from different industries. You can further diversify your portfolio by choosing clients from different countries.
This helps prevent regional issues from impacting debt repayment. To clarify, economic instability is often confined to specific areas of the world.
If you have clients across multiple continents, these potential issues pose much less of a threat. Having a diversified portfolio can help you accommodate riskier clients, as well. With a large client base of reliable businesses, having a single client fail to repay their debt will have less of an impact.
Credit monitoring allows you to identify risks early on. A common scenario could involve a business having trouble making its monthly payments. Its score could also experience a sharp decline after receiving business credit.
Stay communicative with companies that seem to struggle with financial management. It's better to accommodate them rather than having them default.
On paper, a business might not be a stellar candidate. The company could be small and new to the industry. The business could also have a lackluster customer base.
These attributes don't guarantee they'll underperform in the future, though. Some companies in scenarios like these are confident they can improve their financial situation after receiving funds. If they have collateral to offer, consider this when making your decision.
To clarify, let's assume a company is an overall average candidate for business credit. However, they're willing to offer expensive equipment as collateral.
If they don't adhere to your repayment terms, you'll acquire ownership of the equipment. You can then sell it to recoup your losses.
If the numbers add up, they could be worth taking a chance on. To minimize risk, you should only work with clients like these if your portfolio is already stable and diversified.
You should have a plan in place that dictates what to do if things don't go your way. For instance, you may experience a scenario where multiple businesses fail to repay their debt.
This could substantially impact your company's cash flow and make it difficult to stay afloat. While minimizing the credit you allocate can prevent catastrophic situations, it will also reduce your revenue.
The best contingency plans will have methods of securing owed debt. Working with a legal professional goes a long way toward getting the results you need. When looking for someone to hire, explore their past reputation.
See what other people have to say about the experiences they had. Were they satisfied with how long it took to receive their debt payment? What do they have to say about the firm's professionalism?
Examine their pricing structure, as well. The last thing you want is to encounter financial surprises after hiring someone.
You should also thoroughly review their terms. Doing so provides insight into the methods they'll use and what happens if they can't facilitate commercial debt collection.
Proper credit risk management ensures you only lend money to companies that won't have trouble paying it back. From here, your business will continue to run smoothly and you'll avoid issues you may have otherwise encountered.
American Financial Management prides itself on its ability to streamline debt collection. We strive to exceed each of our client's expectations and prioritize immediate, voluntary repayment for each claim. Book a consultation today to learn more about how the process works.
