HOW TO CHECK THE CREDIT RISK OF CUSTOMERS EASILY?

Credit risk is the risk of  default of a debtor to make the agreed payment according to agreed conditions.

Firms are forced to extend trade credit to their customers to grow their business but a default of payment by the creditor may have a very adverse effect on the cash flow and financial position of the creditor firm. 

It is impossible to know exactly which buyer will fail to meet its obligations but properly making credit risk assessment and taking credit decisions accordingly can reduce the severity of a loss.

Knowing who you are working with is crucial. Before entering a commercial contract, firms should assess the credit risk of the counterparty. They can negotiate the terms with the knowledge of the creditworthiness of the counterparty. The creditworthiness information can enable the firms to apply necessary mitigation processes.

To protect from receivable collection risk, firms have to spare time and sources to credit risk management. Companies have to establish a credit risk assessment and management process in their companies and monitor their cash flow to be able to lend trade credit to the buyers.

How to Conduct Credit Risk Management :

Credit risk management is a systematic process of identification, analysis, measurement, and decision making.

-Identification: 

Firstly, the firms have to collect qualitative and quantitative data about the potential or existing customer  as detailed as possible.

This may be the most difficult part of credit assessment of buyers as most of the customers will not be willing to share their detailed information with the counterparty.

-Analysis:

After obtaining sufficient data, the firms have to analyze the risk of the customer. This analysis requires analysis of financial and non-financial data.

During this analysis the financial factors such as sales, profit, capital, balance sheet & income statement etc. are taken into consideration.

As Non-financial factors, the business background, market share, reputation at the market, trade references, strength of shareholders, competence of management, sectoral risks, economic situation, sustainability and compatibility to new regulations etc are taken into consideration.

All these factors have to be analyzed by professional credit analysts or developed software.

-Measurement:

After the analysis the company should have  a measurement: credit score

Credit score represents the creditworthiness of a firm, in other words it indicates how reliable the firm is, at paying its debts on time.

-Decision Making:

Depending on the knowledge of the creditworthiness of the potential or existing customer,  the management of the firm decides the terms and conditions to work with. By giving informed decisions, the firms minimize default risk.

Challenges of Credit Risk Management:

The risk analysis process may be difficult for some credit lenders due to subjectivity involved. 

Many companies try to obtain data about the customers to make credit risk assessment. This is necessary but it is generally very difficult to obtain sufficient data from the counterparty to analyze. 

Solution for the Challenges of Credit Risk Management:

Instead of trying to get information from the buyer itself, getting a credit report from a professional business information agency may enable the creditor firms  to have more detailed information about the buyers. The credit reports of business information agencies are detailed and up-to-date. 

Moreover, the business information agencies collect information not only from the customer itself but also from various sources such as official sources, trade references, banks etc. which may be difficult for firms to access.

A report prepared by a non-biased third party eliminates subjective credit lending decisions.

Additionally, the credit reports do not provide data only, they provide evaluations, analysis and credit risk note assigned by professional credit risk analysts. 

Creditovision provides reliable and up-to-date credit reports  on companies in more than 200 countries. To take informed decisions about your trade partners, access to Creditovision’s portal and get high-quality commercial credit reports.