For companies both large and small, managing expectations regarding receivables is essential. From late payments to ultimately writing off bad debt, the pain spectrum can run wide. Staying on top of your customers’ normal payment practices, changes in payment terms, and potentially significant underlying factors in their businesses is no easy task, yet this responsibility is crucial to the sustainability of a healthy company in a global supply chain.
Fortunately, with good optics, companies can safely manage their exports and capitalize on emerging markets while minimizing the risk of bad debts.
Customer transparency. Monitoring financial statements and available banking information frequently, even sometimes quarterly, is essential. Plan on reviewing income statements, balance sheets and, in particular, cash flow statements and projections to determine a customer’s ability to generate cash flow.
Market knowledge. When entering into a new customer relationship, invest time and resources to learn local commercial regulations, accounting and legal practices as well as other cultural issues that could influence remittances and, if needed, the ability to access effective collection services.
Financing partners. Check the bank’s ability to manage the legal requirements of buying receivables in a certain country as well as supporting offsets such as credit/debit memos. Banks may be unwilling to buy receivables from the types of customers you target (e.g., geography, currency, payment term, credit risk). Has it taken a long time for a bank to include a customer in the system? That may be a red flag.
Understand costs. Make sure you are well aware of any hidden costs, such as delayed on-boarding and participation, UCC filings in the U.S. or legal fees. There also might be costs associated with the supply chain process, such as order-to-cash, source-to-pay or settle-to-fulfill, or technology, including constructing software infrastructure, adopting new applications and re-engineering existing IT systems.
Flexibility and trust. With evolving trade circumstances, flexibility is essential in the supply chain. How far will a customer go to circumvent supply chain risk? Also, trust must be established to ensure each party in the sale will do everything possible to meet their obligations and timelines and, thus, maintain cash flows. Do you have the trust and support of your customer’s chief purchasing officer and commitment from the executive team?
Atradius Trade Credit Insurance is a global provider of trade credit insurance, surety and debt collection services with a presence in every continent. Their teams of analysts monitor countries, regions, governments and individual companies to help deliver competitive intelligence related to emerging markets and associated trade risks.
—Doug Collins, vice president and regional director of risk services - Americas, Atradius