Have a strategy. What are your criteria for giving credit; which customers will you monitor; how will you spot potential defaulters? The Better Payment Practice campaign says: 'Cash flow is the life blood of a business and should be protected as a priority. Good credit management includes a strategy for credit checking customers, a well-planned collection process and a system for dealing with queried invoices.'
Get checking. According to Experian, less than half of SMEs conduct any due diligence on new customers or suppliers. A basic credit report includes a credit score, a credit limit and details of County Court judgments. Ade Potts, managing director of Experian's SME business, says: 'Carrying out a credit check on any new business partner should be standard practice.'
It's not a one-off. It's not enough to credit check once, or even once a year. 'A credit report gives you a snapshot at a moment in time,' he explains. 'So, monitor on an ongoing basis.'
Choose your focus. You may not have time to monitor all your customers. Using the Pareto Principle, you could focus on the 20% that contribute 80% of your turnover or profits. Don't work through in alphabetical order.
Look for red flags. Alarm bells are often sounded by a changing pattern of behaviour, says Nick Hood of financial risk specialist Company Watch. 'Orders going up suddenly could mean another supplier has put a stop on this customer. Delays in taking deliveries or in paying are also warning signs,' says Hood. 'If a company asks for more credit or says it can only pay a "round" sum this month, those are both classics.'
Visit Companies House. Company accounts give you the financial picture, but there's more to look for: a new owner can affect creditworthiness, while departing directors may indicate a business in decline. 'Late filing of accounts is a red flag,' says Hood, '80% of companies going into liquidation have overdue accounts.'
Use social media. Listen for news and gossip about customers in conventional and social media. Grumbles about service are less important than intel on their supply chain.
It's a team effort. To manage credit risk, you need to involve everyone, says Hood. 'Your sales team often know stuff they don't pass on and you'd be amazed what your delivery drivers pick up at the customer's premises.'
Get protection. Credit insurance and factoring can be helpful because the practitioners carry out their own assessments.
Give – and take. Offer information about your customers' performance and other suppliers – including competitors – will share theirs.
Do say: 'Our credit lines are commensurate with our assessment of customers' credit risk'
Don't say: 'That company on the News last night going bust – isn't it one of our customers?'