Limit your credit risk in 3 steps

Extending credit to customers is a strategy that promotes revenue and income, but it also comes with risks. Unrecoverable receivables can impact your company’s cash flow and margin. Here are three steps to effectively limit credit risks.

1. Know Your Customer

To avoid credit risks, it is crucial to thoroughly know your customers. Always order a credit report. The credit report provides immediate insight into the creditworthiness of your potential customer. In addition to a credit report, online searches and information from fellow suppliers can provide valuable insights. Keep in mind that customers may not always be transparent about changes in their financial situation, so it is up to you to conduct proactive research.

2. Examine the Annual Accounts

Annual accounts offer a window into the financial health of your customers. This is the reason they are processed in our credit reports and are included in the calculation of a company’s creditworthiness. Apply common sense when reading the credit report because high creditworthiness for a large company can be as good as lower creditworthiness for a smaller company.

3. Understand the Industry

In addition to knowing your customers, it is vital that you are familiar with the industries in which you operate. Understand who the market leaders are, the growth prospects, and the challenges within the industry. Anticipate industry changes that can affect your company and the credits you provide. Adjust your approach based on expected payment terms and trends.