A sale is only a sale if you get paid

How are you protecting your cash flow? Most businesses trade on credit terms with their customers, letting them purchase as they need and pay later.

This can be a great way to build your customer base and gain more work or sales, since customers will often buy more if they don’t have to pay immediately. 

However, extending credit to your customers, while a common and strategic business practice, also comes with risks so it’s important to protect your business accordingly.

One of the biggest problems with a line of credit is that it can affect your business’s cash flow. And a healthy cash flow is more than just a sign of a healthy business, it can be a make-or-break factor. A stable cash flow lets you pay staff, buy materials, and meet your debt obligations.

In extending credit to your customers, you need to take this into account and ensure you arrange regular payments from customers to keep cash coming in. It’s also essential to conduct due diligence regarding your customers, including comprehensive credit checks, to ensure you’re not taking on bad debt.

For new customers, it could be worth setting payment terms of 30 days so you can find out sooner rather than later if there will be problems with the payment. While older, more established customers may have 60-day or even 90-day payments terms, this should be an earned privilege rather than an automatic right for all customers.

When your business has substantial amounts of working capital tied up in accounts receivable, or the bills as-yet unpaid by line-of-credit customers, you face a significant risk if customers don’t pay on time. Your biggest debtors present the biggest risk and, if one of these were to become insolvent, it’s important to understand how that unpaid debt would affect your business.

Here are three key ways businesses can extend credit to customers without facing undue risk:

  1. Be choosy
    It’s safer to work with customers that can demonstrate a strong credit history and on-time payment track record. A company promising a large order but with no visible means of paying could present a huge risk that isn’t worth the potential reward. By contrast, customers with a more conservative ordering approach who are known to pay on time are more likely to benefit your business in the long term.
     
  2. Be timely
    To encourage customers to pay on time, it’s important to invoice them in a timely manner and make your payment terms clear, whether it’s 30 days or longer. If payments are late, you should then chase them up in a timely manner to set the expectation that late payments won’t be tolerated. If necessary, you may need to instigate collections proceedings to ensure you receive payment.
     
  3. Be protected
    Trade credit insurance can protect your business against losses, covering the shortfall when customers don’t pay. This protects your cashflow. However, a trade credit insurance provider can do more than that. They can also provide assistance with due diligence and credit checks to ensure you only extend a line of credit to trustworthy customers. They can provide debt collection services if customers don’t pay. And they can provide market assessments that help you understand the risks and opportunities in your sector so you can make smarter decisions.

You don’t think twice about insuring for business interruption, professional indemnity, business vehicle, and commercial buildings and content insurance. But what about insuring the number one thing keeping you in business – your cash flow? Credit insurance policies cover goods and services sold and delivered, and can be tailored to cover many risks, like work in progress and binding contracts. This means that even smaller businesses that operate on lean budgets and profit margins can continue to do business with the assurance that you will be covered if your customers don’t or can’t pay outstanding invoices.

In such an event, trade credit insurance can often step in and provide the capital for your business to keep operating without needing to opt for comparatively risky options such as extending credit or overdrawing accounts and eating into what might be a meagre buffer zone.

How good are you at protecting your cash flow?

Get an instant overview of potential areas of trade credit risk for your business with our free checklist.

You’ll be able to identify potential gaps within your credit management process and ensure that your businesses is appropriately managing risk and enabling trade by securing your cash flow.

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Disclaimer

The statements made herein are provided solely for general informational purposes and should not be relied upon for any purpose. Please refer to the actual policy or the relevant product or services agreement for the governing terms. Nothing herein should be construed to create any right, obligation, advice or responsibility on the part of Atradius, including any obligation to conduct due diligence of buyers or on your behalf. If Atradius does conduct due diligence on any buyer it is for its own underwriting purposes and not for the benefit of the insured or any other person. Additionally, in no event shall Atradius and its related, affiliated and subsidiary companies be liable for any direct, indirect, special, incidental, or consequential damages arising out of the use of the statements made information herein.