Minimising credit risks and getting paid on time (in a pandemic)


The global coronavirus pandemic has compounded an already precarious global financial situation. Without wanting to dwell too much on the impending recession, depression even, the writing has been on the wall for some time… long distant from a time when Corona was just a beer and masks were for Halloween.

Back in 2018, an article in Forbes trumpeted that “The 2020s Might Be The Worst Decade In U.S. History,” due to a credit crisis that will trigger global financial contagion.

Also, in the same year, Former Fed Chair Ben Bernanke likened the US economy to an episode of Looney Tunes, with benefits from fiscal stimuli ─ such as the 2017 tax cuts ─ fading out in 2020. The result, he predicted, would be U.S. economic growth facing a challenging slowdown and making the Fed’s job more difficult especially if it comes at a time of “very low US unemployment.”

Similar concerns were voiced from industry heavyweights, such as Moody’s Analytics, JPMorgan, Nouriel Roubini, BlackRock, and countless more.

And that was before the someone in Wuhan picked an ill-advised dinner on their trip to the wet market.

Businesses across the globe are seeing these dire predictions come to fruition and must quickly pivot to secure and maintain their cash flow via new and vigorous assessments of their credit risk.

Locked-down spending and spiralling unemployment

Since the start of the first lockdown, consumer spending has dropped considerably. The impact of this can be felt across virtually every sector now ─ as first-order spending fuels earnings, supporting further spending and so on.

Even those consumers who have the money and want to spend it, can’t travel, drink, or dine out with the freedom they were used to, or partake of other activities that would funnel money back into the economy in areas of greater liquidity.

As Barclays lowered their second quarter GDP figures, expecting the US economy to contract 50.8 percent from the first quarter of 2020, Christian Keller, an economist for the banking group, stated:

“Labor markets are where the lockdown-induced supply-side shock of closing businesses and the demand-side shock become intertwined” and “households that are out of work with uncertainty about future income — even if temporarily receiving unemployment benefits — are likely to hold back on spending.”

With unemployment currently at 4.8 percent in the UK and 2.5 million workers (about 8 percent of the workforce) on extended furlough, it’s unlikely that the economy will bounce back quickly when the pandemic lifts.

Life goes on, credit teams pick up the slack…

As businesses feel the pinch, with customers buying less, there is a greater demand for credit and longer payment terms. In some cases, this will not be enough and late payments, delinquency, and bad debts will rise.

Businesses have a difficult choice: to extend credit where needed and support their customers, or reduce credit in an effort to limit risks, ultimately losing business to those who can offer more supportive lines of credit.

With rising uncertainty and financial pressures, there will be a need for greater visibility of, and focus on, payment status and the collections process. Streamlining, automating, and simplifying other areas of accounts receivable will enable teams to switch to this greater focus on collections over the coming months or even years.

Minimising credit risks through factoring and managed receivables

In these challenging times, businesses may want to maintain a close eye on payment status to work through payment challenges with each customer. However, the practicality of factoring, or outsourcing AR debts to a managed service provider, will appeal to many as a way of ensuring cash flow.

Factoring receivables via a bank or financial service company provides an immediate inflow of cash, albeit reduced slightly from what would be achieved by collecting directly. Whilst providing assured payments, the process of grouping, assessing, and then receiving payment for receivables is something of a departure from the continuous process of invoicing and collection.

When you simply need the cash on time, factoring can be a great fit. But this does come at a price. Any business with a vested interest in customer relationships may feel a little awkward handing off the sensitive process of collecting debts to a third party.

One alternative is to employ a managed receivables service, such as the managed receivables service from Corcentric. This service dovetails into your existing AR processes, allowing you to set a specific payment timeframe for all receivables. The result is direct control over DSO and eliminating the risk of delinquency or bad debt.

Managed receivables as an extension of your credit team

The advantage of a managed receivables service, over traditional factoring, is that it provides a more integrated process. Rather than grouping and selling AR in batches, you are simply rerouting all invoices through your managed receivables provider to be paid a specific number of days after invoicing date. It’s like having all of your customers become good payers, with no exceptions.

A managed receivables service is an extension of your credit team. You can add and remove accounts and there’s a two-way flow of information to keep you informed and in control. Good customer relationships are at the heart of a successful credit process, which is why working with a managed receivables partner can provide a valuable reassurance.

So, if you don’t fancy the loss of control you may feel when selling your receivables to a bank or factoring service, get in touch to see how Corcentric can provide you with guaranteed payments ─ regardless of whatever challenges the pandemic, Brexit, or 2020/21 throws up next.