Trading comes with the risk of clients defaulting and leaving a business without the cash they were promised. Not only do businesses have to deal with no payments but they also have expended good resources in chasing unpaid invoices. An assessment of clients' credibility before a deal can enhance the efficiency of your business, meaning greater profits.
In this article, we will explore the steps you can take to mitigate your risk. Offerings can come in many different packages and vary in cost and efficiency.
Credit Reports
Before a business can explore tools to outsource its risk it must first reflect upon the risk level of its customers, suppliers and itself.
Credit Bureaus provide credit reports based on legal and registered data on private companies, and trade data on public economies as well as give a traditional credit score. They rely on the logged activity of the company and partner companies. Credit Bureaus like Dun & Bradstreet, Experian, and Veda provide a lot of information but lack transactional and up-to-date company financials, preventing them from providing a reliable prediction model.
CRiskCo provides an alternative credit report to show an individual credit score for each of your customers. This is different from what credit bureaus provide as it is based on actual accounts receivable information from the customers' cloud-based accounting systems. It can give you real-time credit data, reliable risk assessment and predict when the customer will likely pay next.
Invoice Discounting
A business offering a customer discount for early payment or within a certain time period that is less than the due date of the invoice.
Benefits: Creates a stronger incentive for customers to pay early and thus improves your cash flow. Low costs vs other solutions and keeps your clients happy.
Concerns: Your customers may get used to the constant availability of discounts and may start to demand more of it.
Invoice Financing / Factoring
This method involves selling your invoice to a factoring company to get rid of the risk completely. By selling the invoice to the factoring company you will receive immediate cash and pass on the risk to the factoring company. The pinching point is that you only receive about 85-90% of the value of the invoice.
Benefits: Invoice factoring is getting faster with online factoring solutions, and it is a straightforward process which quickly mitigates the risk posed by the defaulting company and gives you immediate cash.
Concerns: This is by far the most expensive solution as you need to pay 10%-15% of the value of your invoice to the factoring company.
Traditional Invoice Insurance
This solution involves you applying to insure your entire portfolio at the cost of a commission of 0.5%–2% of the total value of your portfolio. The insurance will cover lost invoices in case of financial default.
Benefits: The risk of approved customers are directly reduced and it is a much cheaper solution than Invoice Financing/Factoring.
Concerns: Your entire portfolio must be approved by the credit insurance company and then each and every one of your customers must be approved and set a line of credit. Small to Medium businesses suffer significant difficulties as the majority of their smaller customers will not be approved.
Single Invoice Credit Insurance
The newest real-time insurance solution. Single Invoice Credit Insurance is built on the basis of choice whereby you have the option to specify a vendor or invoice that you would like to insure in real-time. This innovation gives businesses of all sizes the power to choose on the spot which customer's invoice they want to insure and when they want to do it.
Benefits: If you want to get insurance for several of your customers and not the entire portfolio, this is the most effective and cost-effective option. This solution gives you operational flexibility to control your company risks.
Concerns: Not all customers will be eligible for cover. Costs are higher if you wish to use it for all your customers.
Reverse Factoring
A finance company pays the invoice to the vendor at a discount in exchange for early payment. This is called a letter of credit as the business will pay the finance company the full amount at a later date.
Benefits: It allows you to scale your business and acquire more goods quickly to sell. Maintain your cash flow, especially with long credit sales.
Concerns: This solution could potentially increase your business's risk as you take on more debt.