ProTips: How to Better Manage Credit Risk

This is a guest post by Richard West, Chief Revenue Officer at Red Flag Alert. 

According to Red Flag Alert, every year in the UK when businesses fail, £4 billion worth of invoices are left unpaid. During the insolvency process, it's unlikely that suppliers will ever see the money they’re owed. In fact,  suppliers don't see a penny in 80% of insolvencies.

Fortunately, businesses can minimize risk through a series of steps. By following our five-step guide, you can ensure that if you do ever get the dreaded letter from an insolvency practitioner, it won’t mean the end for your business.

ProTip 1: Diversify risk

If you only have a few big clients, your business is in a precarious position.

If this is the case, make sure to keep a close eye on their financial health and address the problem directly if they are showing any signs of distress.

Aside from monitoring key clients, take steps to build a more diverse client base to minimize risk in the event that your main client does fall on hard times.

ProTip 2: Tighten your credit terms

This isn’t always easy—especially when dealing with a large client. However, you should try to make payment terms more favorable to you wherever possible. There are a few ways to do this:

  • Stagger payments so some of the contract is settled upfront

  • Shorten your payment terms—even seven days can make a big difference

  • Include a retention of title clause so you can recover stock

  • Use just-in-time delivery to reduce exposure to losing valuable inventory

If your old clients won’t budge, at least draw up a new contract so that any new customers you onboard are on stricter terms.

ProTip 3: Improve your margins

You may not be able to recover cash faster, but try to make sure your profit margins are as healthy as possible. You may decide to keep servicing financially distressed clients, but make sure you profit now because you’re risking a loss in the future.

Ramping up prices may not work, but there are other steps you can take like asking for a discount, having some fees waived, or looking for other ways to improve the margin.

ProTip 4: Optimize VAT payments 

Currently, thousands of companies are using a VAT regime that puts unnecessary stress on cash flow.

Depending on the circumstances, your business may be eligible to pay the VAT when you get paid rather than when you issue an invoice. This VAT cash regime can help with liquidity which may be the difference between staying in business or becoming insolvent.

ProTip 5: Consider credit insurance 

Credit insurance lets you make a claim if one of your customers is unable to pay. There are many providers offering credit insurance with varying levels of coverage. There are large insurers that operate across a range of sectors as well as niche providers.

Credit insurers complete due diligence and are unlikely to provide cover if a customer is deemed very high risk. If you can’t get credit insurance on a company, it’s a sign to take a deeper look at their financial circumstances.

Company Credit Checks for Zoho CRM—your early warning system

If you want to check the financial stability of your UK prospects and customers, Company Credit Checks for Zoho CRM is your early warning system. This extension helps you connect your CRM to a live Red Flag Alert database containing financial information of over 6.5 million UK businesses. The extension shows the financial health of every UK business and saves your valuable time when researching your prospects and customers by automatically updating key data to Zoho CRM.

Company Credit Checks uses an advanced AI algorithm to generate a financial health rating, which predicts the likelihood of business failure in the next 12 months. If one of your clients is facing financial distress, you will be informed immediately. If you need to take a closer look at a client, Company Credit Checks also has a treasure trove of useful financial data, including how long they normally take to pay bills, estimated turnover, cash, key decision-makers, and much more.

Using Company Credit Checks for Zoho CRM can protect you if a client’s business fails by helping you make better, more informed decisions about your prospects.

 Try Company Credit Checks for Zoho CRM 

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