Especially in difficult economic times, the risk of credit default plays an explosive role. Every supplier who sells his goods or services on open account with a payment term is exposed to this risk. In the short term, the receipt of payment is at risk, in the medium and long term, sales can drop off.

The success of a company is also determined by taking the “right” risks. Managing credit risks also means estimating the payment risk of customers as accurately as possible and operating efficient credit management.

In times of crisis, companies often unintentionally become larger “lenders”, as is the case now, as many customers are already asking their suppliers to extend payment terms. However, unplanned changes in the period during which capital is tied up can create deadline risks for the company and endanger its own liquidity.

Internal data in particular provide the first indications of imminent payment difficulties on the part of customers. Even healthy companies can get into financial turmoil. If this happens, professional risk monitoring by the insurer is advisable for the supplier.

The most common early warning indicators are:
– A change in payment behaviour, a strong deterioration in payment behaviour, an extension of payment terms as well as an unjustified discount deduction despite the utilisation of the payment term.

– A significant reduction in the usual order quantities (possibly lack of demand) or an extraordinary increase (possibly a sign that other suppliers are already withdrawing due to negative indications).

– Unexpectedly demanded payments on account, partial payments or unfounded complaints.

– First signs of liquidity deficiencies, such as uncashed bank debits, bill protests or bounced cheques
– Instalment payment plans.

A closer look should be taken at financial risks, especially liquidity risks. The monitoring of these risks ensures that a company’s solvency is maintained at a level that is essential for its existence.

Challenges for credit management as part of working capital management:

– Up-to-date and comprehensive information about one’s own receivables structure and the payment behaviour of customers is crucial for the management of receivables inventories, especially now.

– Your dunning strategy, which includes the start and end, frequency, number and type of dunning notices, is well established. Examine the customer portfolio. The dunning activities can vary depending on the fulfilment of defined criteria (e.g. amount due, customer risk class, countries, etc.)

– Check your room for manoeuvre within the framework of the planned corporate development. Permanent monitoring of the receivables inventories makes current developments clear and thus enables you to react quickly to negative trends. In this way, the necessary measures can be initiated immediately in order to identify problematic developments in the receivables inventory at an early stage and to counteract them.

Companies like to use credit insurance to secure supplier credits. This at least partially shifts the risk of default.

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Lisbeth Lorenz

Group Practice Leader Credit & Political Risk

T +43 664 883 805 12