When you’re trying to grow your business, one of the most important things is stable cash flow. But to get to that point, you need to have customers that pay you on time and whose businesses are strong and unlikely to run into challenges like bankruptcy. That means making sure your evaluation process is strong: especially when you’re evaluating high-risk accounts.
A stronger evaluation process doesn’t mean automatically rejecting riskier customers. Instead, you and your teams need to understand risk clearly, document decisions and make choices based on strong data. Let’s get into the steps you can follow to make sure you’re properly evaluating your high-risk accounts.
Things change. Even the best customers could still pose a risk to your business if you don’t anticipate those changes.
But change doesn’t usually happen overnight. Instead, there are small red flags that you can identify: and the earlier you do that, the better prepared you are.
Yes, a credit limit in a business credit report is useful when you’re thinking about whether to work with a business and how much you can offer them. But it’s not enough to look at a credit limit and decide from there. Instead, you need to understand why that limit is what it is.
Focus on:
A traditional credit report shows you a snapshot of how a business is doing right now. But that’s not enough to make a decision about a long-term business relationship. Instead, you need to analyze trends over at least a 12-month period. What if the business had a really strong last quarter, but they’re deteriorating overall?
Ask questions like:
You can’t make choices about your potential customers if you don’t actually know who owns the business. Often, things aren’t as cut-and-dry as a single listed owner. The business could sit under a parent company, or operate out of a country that poses a risk to your business through sanctions.
Look for:
That little company you aren’t too sure about working with? They could be backed by a parent company with deep pockets. Or, on the other hand, a seemingly-perfect potential new customer could be owned by a struggling parent company at risk of declaring bankruptcy. Either way, you need the full picture before you can make any kind of decision.
Red flags to look out for include:
When a potential new customer is part of a group ownership structure, your credit decisions should consider:
Risk can come from lots of different places. It’s not always about what’s going on with an individual company: sometimes risk increases based on industry dynamics. A business could be doing everything right, but if the industry hits a snag, it could impact every business in the sector.
Sector-specific risk could impact:
What’s risky in one sector could be completely normal in another. In our recent research study Working Capital Dynamics, for example, we found that the agriculture, forestry and fishing industry leads the nation in on-time payments. If a potential customer in that sector had a very high DBT, it would be a serious red flag that that business could be struggling with cash flow. But the transportation and public utilities sector has a significantly higher DBT on average – a company with the same DBT wouldn’t necessarily pose the same risk.
Being intentional about your credit policy – and clearly communicating the rationale behind the decisions across teams – is key to properly evaluating high-risk accounts.
A clear rationale:
Remember: every decision you make should be backed by accurate, up-to-date data.
Documenting these decisions:
Congratulations: you’ve set your perfect policy for high-risk accounts. But that doesn’t mean the work is done. In fact, no credit policy or evaluation procedure should ever be “done.” Instead, it should shift and update along with your business, industry trends, economic changes and anything else that might sway your risk appetite.
Rule of thumb: If the risk profile changes, the credit limit should too.
If you want to evaluate your high-risk accounts to make stronger business decisions, you’ll never be able to eliminate risk altogether. Instead, you should be focusing on understanding risk clearly and managing it proactively.
Remember:
Yesinne Alvarez, Partnerships and Alliances, Creditsafe
Yesinne Alvarez is Manager of Partnerships and Alliances at Creditsafe and supports the Trade Data Team with deep cross-functional expertise. With extensive experience in Relationship Management, Project Management, and Business Development, Yesinne brings both authority and trust to her role. Her background includes senior roles in recruiting and strategic development for Fortune 100 companies. A recognized expert and respected thought leader in the Credit to Cash community, Yesinne has frequently spoken at industry events and served in leadership roles, reinforcing her trusted status in the credit and finance space.