Blog Risk & Credit

How to deal with potential effects on credit management during the crisis

| July 01, 2020

In our current not quite so normal conversations with customers, there is always a lively exchange on how to deal with the possible effects in uncertain times. What is the best way to face the challenges? What priorities should be set in this environment? The following four points are generally among the most important factors to be taken into account when reassessing credit management.

1. Ensure a risk balance appropriate to the environment

A prolonged period of economic prosperity and low levels of insolvency may have influenced the day-to-day approach to credit policy by adding more risk to the portfolio than would be appropriate in a slow-growing or recessionary economy. Re-evaluate your company’s credit policy to recalibrate the risk profile of your portfolio for new and existing customers.

2. Set credit limits appropriate to the situation

Use this opportunity to realign credit limits. Make sure you are aware of the credit exposure you have for this customer for the entire global corporate hierarchy. Consider adjusting credit limits (up and down) based on the individual risk assessment of this customer.

3. Reconsider payment arrangements

Assessing the potential risk of each new business partner or even contract extension will help to realign your credit terms based on the likelihood that the business partner will pay on time and on schedule.

4. Monitor your portfolio risk continuously

Probably the most pressing issue for us: monitoring the credit risk of the entire global portfolio to detect weaknesses that could lead to defaults due to potential insolvencies.

The four points already mentioned make it very clear what every credit manager has to have on their screen to be able to make a truly valid risk assessment. In a global context, relying purely on your own gut instincts has to be considered negligent – now more than ever. It puts not only your own job at risk, but the whole company. Nowadays you no longer have to gaze into a crystal ball and play a guessing game with the numbers.

Traditional scoring models usually infer the future from past experience. So far, though, there is not much experience of the economic impact of COVID-19.

The Bisnode Corona ranking uses both known factors from a company’s past and three new COVID-19 factors.

 

Make an investment in the health of your business

Modern solutions such as D&B Credit allow worldwide monitoring in over 200 countries. Fully automated. In times of crisis it is particularly important to work only with solvent companies and understand your own company’s interdependencies. This is the only way to be sure you will not be caught off guard by a default. And it is obvious that the current crisis will lead to a large number of defaults and a sharp increase in insolvencies in the near future.

Fluctuating payment practices have been a major problem in international cooperation over the last few years, and the crisis has made it more than ever a game of luck as to which companies you can rely on and which you cannot. Monitoring is the ace up your sleeve in this game. You gain precise insight into the health and payment practices of the company, giving you a valid and solid basis for avoiding risks and, on the other hand, taking advantage of opportunities that remain hidden to others. So it is an investment in the health of your company which is of absolute, existential importance.

But it’s not simply a matter of monitoring alone. Our team of analysts and economic experts around the world uses our data and insights to monitor the corporate landscape of the regions concerned and assess how international business relationships affect group structures via corporate linkages. This lets you identify which of your business partners are affected by the coronavirus pandemic and to what extent.

There are opportunities in every economic situation. Set yourself apart from those companies that may need to recognise quickly that, while bad debt losses have declined over the past 10 years, we may be entering a new economic reality requiring a more proactive approach to credit risk mitigation.