There is this one truth about B2B businesses, it largely depends on TRADE CREDIT. So, what exactly is Trade Credit? In B2B, it is something that buyers use to improve their cash flows, while sellers use it to increase their sales. Due to its prominence as a financing source even in countries such as the US, it has been researched extensively. According to estimates, in the US, about 97% of B2B transactions are made on credit. This is because the Trade Credit not only helps you grow as a business but also determines your customer-client relations, the company’s cash flow and above all your ability to win new customers. To achieve these benefits, companies spend a huge amount of cash and time on establishing an effective Credit Management System.
Credit Management is the process of granting credit, setting the terms on which it is granted on, recovering the credit when it’s due, and ensuring compliance with the company’s credit policy. B2B businesses that establish an effective credit management system outperform those who don’t. One might think that this is all to know about credit and its management. But that is just half-truth. The secret lies in an organization’s ability to adapt to changing trends in the macro-economic environment.
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Macro-economic Environment: The Agent Of Change
Today, there is not one but a varied number of factors and trends to keep in mind when designing a Credit Management System. At times, multiple businesses under the same organization tend to have different policies for assigning credit. This is widely due to the geopolitical factors of the regions they operate from. Companies are faced with several challenges such as government imposed tariffs, inflation, corporate tax reform, and continuously changing government and its rules.
Keeping all these challenges in mind, it might not be wrong to say that credit management techniques have changed drastically. Earlier the main concerns were: information gathering, proper assignment of credit limits and timely collection. Organizations were not very much concerned about changing governments or international tariffs. All of which has changed in the last decade. Now environmental events and international policy are greatly interrelated and most vital for an organization’s growth domestically and globally.
To get a better understanding of these challenges and how organizations globally were affected by these, let us move forward.
Mitigating The Uncertainty Of Tariffs: Re-Designing Credit Policies
One of the major factors affecting international as well as domestic trading is TARIFF. It is a government-imposed tax or duties that are to be paid on import or export of products. Businesses, irrespective of the country or region, cannot avoid tariffs and must consider it while designing a Credit Management System. But how can tariffs affect your business? Due to changing governments the tax reforms also change and one must skillfully adopt the change and adapt to it. Some of the effects of Tariffs are below :
Inflation in Product Prices: While doing business in different markets, credit analysts are faced with the challenge of inflation due to varied tax reforms in the region. As a result of this, credit limits get affected hindering the customer-client relation and also affecting the customer’s business.
Growth in Unemployment: As a consequence of inflation, customers delay their purchase orders in the expectation that the tariffs would be reduced shortly. All of which results in poor or less business. Due to fewer sales, the requirement for employees reduces resulting in higher unemployment rates.
Less Competition: Another consequence of tariffs has been that it narrows the opportunity of international trading. This reduces competition of the local vendors who are now favored. Even though this helps boost the economy locally, it hinders overseas business and leads to unemployment.
In Canada, several businesses were facing backlash due to the increased tax rates in the USA. Customers were delaying their purchases as they did not want to be at a loss when the rates lowered. All of which greatly affected international trading in Canada and gave rise to inflation and unemployment.
Risk Mitigation
Risk Mitigation is a very vital aspect of Credit Management. This helps identify and eliminate any issues or risks associated with the customers either while assigning credits or during periodic reviews.
Distilling Customer Data
Data is the backbone of any business. Hence, the scarcity of data can be a huge obstacle to your business. This issue is largely faced by the credit team while assigning credit limits. Credit analysts, who need to thoroughly run a financial background check on the new as well as existing customers, are faced with multiple challenges due to insufficient data.
There are times when there are no financials available for certain customers for a credit review. Then there is the challenge of anticipating the risk associated with such customers. Apart from these, there are conditions such as a company going bankrupt, or undergoing mergers and acquisitions. Even then, there is risk associated with such kinds of customers where one doesn’t have financial information available. Under such situations, the company faces a problem in mitigating risks in credit limit assignment.
Organizations tackled this issue by implementing different solutions. Where some assigned a full department to tend to this problem others set up technical solutions for credit information aggregation to rationalize the customer payment terms and to deactivate as many as they could. While having insufficient data was a problem, large volumes of data caused much more trouble. Their main concern with huge volumes of data was how to distill the required data to make decisions in credit for business.
Risk Mitigation For Global Operations
Risk mitigation in different high-risk global operations such as requests to extend credit terms, the region with high tax reforms, regions with weak law and international businesses missing financial data, is different. Credit analysts across organizations resolved these issues by implementing various risk mitigation strategies. Some of the solutions implemented were:
ETR (Electronics Title Recognition) Systems: There were instances where credit analysts were approached by employees from other departments to extend additional terms. In such situations, an ETR system was set up to approve/disapprove such requests. The system suggestions were based on past financial records.
Letter of Credit: The same organization with multiple businesses across geographies, treats the same customer differently. Customers from Europe were rendered a different treatment than customers from Asia or South America. The real trouble was in areas with not so strong rules or laws. In such cases, the Letter of Credit played a vital role in ensuring risk mitigation.
Aid from Local Businesses: In international trading, insufficient data hindered the process of credit assignment. To mitigate this risk, several organizations took aid from local businesses. They gathered pieces of information regarding their financial and economic data from the local businesses. These helped them gather data and mitigate any future risks.
Advance Payments: The main focus of the analysts is to recover the economic cost. In areas where risk was high due to increased tariffs, an advance of 20%-30% was taken. This amount would cover the economic cost and prevent huge losses.
Tax Authorities Driving For More Transparency Over The Invoicing Process
With the changing governments and geopolitical trends, organizations have to undergo major changes for their credit management systems and risk-mitigating strategies. All these policy changes brought by the changing governments are implemented to gain more control over the cash-flow, invoicing process and the tax amounts during the trade.
With the changing trends, businesses globally are faced with several challenges. Their ability to tackle problems and to keep up with the change determines their success. These were only a few instances of what global measures were taken, by industries, to keep up with the geopolitical trends.
How HighRadius Credit Risk Software Helps Improve Credit Risk Assessment
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With real-time credit risk management tools and AI-powered credit management solutions, finance teams can receive alerts for changes in customer credit profiles and make faster, data-driven decisions using unlimited credit reports. The platform integrates with ERP systems and can begin monitoring customers in as little as 30 days.
- With real-time credit risk analysis software and credit decisioning software, you can receive alerts for any changes in your customers’ credit profile and make data-driven credit decisions from unlimited credit reports. Our software integrates with your ERP system and can start monitoring your customers in just 30 days.
- We offer configurable credit scoring software and approval workflows that can be customized based on geography, customer segments, business units, and other factors. You can fast-track credit approvals through complex corporate hierarchies, making the credit application process more efficient and streamlined.
- Our highly configurable online credit application allows you to onboard customers across the globe with multi-language, customized credit applications embedded on your website. You can automatically capture financials, personal guarantees, and check bank references, reducing the need for manual data entry.
- Our software also automatically extracts credit data from over 40+ global and local agencies, including credit ratings, financials, and credit insurance information. You can configure the auto-extracted data in your preferred currency, making it easier to analyze and interpret.
- With AI-based blocked order management, you can auto-predict blocked orders based on the customers’ credit limit utilization and payment history. You can leverage AI-based release or partial payment recommendations for faster credit decisions, reducing the need for manual intervention.
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