Credit Risk Management for SMEs: Understanding the Top Challenges Faced by Them

What you’ll learn


  • A complete guide to credit risk management for small and medium-sized enterprises.
  • Understanding the key challenges faced while performing credit risk analysis for SMEs.
  • Learn how automation can help with credit risk management and continuous risk monitoring

Credit Risk Management For SMEs

What is credit management?

Credit risk management is the process in which supplier credit teams analyze the risks associated with a buyer before selling goods to them on credit. For example, in a B2B scenario, as goods are sold on credit, it is crucial to analyze the customer’s credit risk to ensure timely payments.    

Credit risk management is crucial for small and medium-sized businesses because, in most cases, SMEs focus on increasing sales against analyzing portfolio risk carefully. Businesses that do not pay attention to credit risk management can experience delayed payments, which affects their working capital.

Credit Management Process in SMEs vs Large Enterprises

Credit risk analysis varies from one organization to the other. The challenges faced by a mid-sized business can be different from that of a large enterprise. Often bigger companies have a dedicated credit risk analysis team that mines customer data, looks at customer credit reviews, and even secures a bank guarantee before extending credit to customers.

But with medium-scale businesses, access to credit rating sources and the cost attached, not to mention the man-hours required, may pose a challenge. So with medium-scale companies, one of the ways to mitigate credit risk concerns is by automation.

Let’s dig deeper to understand how is credit management handled for SMEs vs. large enterprise businesses: 

Credit Risk Management Process Small and Medium-Sized Businesses Large Enterprises
Access to Latest Customer Information Lack of Access to Updated Data

With mid-sized businesses, getting access to the latest and accurate customer data (payments received, invoices due, etc.) is always a challenge.

Additionally, they lack systems that can provide them with a complete overview of the information they require to refine their dunning and collections process. As a result, efforts are often wasted on low-risk customers resulting in poor customer experience and unstable cash flow.

Customer Data Siloed Across Various Sources

Large businesses do consolidate the customer information, but because of multiple business units, complex internal stakeholder hierarchy, it is difficult to get hold of the correct data at the right time. So, extracting data is a complex procedure and requires manpower.

Credit policy No Defined Credit Policy for Risk Management

Mid-sized businesses usually don’t have a standardized credit framework. As a result, they tend to take each customer’s review on a case-to-case basis, whether onboarding a customer or the steps they take to manage delayed payments.

Standardized Credit Policy Across Geographies

For large, global enterprises, there is usually a standardized credit policy in place. This credit policy guides the credit teams through every possible instance they may encounter: from customer onboarding to blocked order reviews. In addition, this policy helps the credit teams across geographies to analyze customer’s credit risk consistently.

Credit Management Team and Talent Utilization Credit Professionals Multi-Tasking in SMEs

SMEs are small organizations that might not have dedicated credit teams. Usually, the credit professional takes up other responsibilities in the A/R process, such as collections and cash application.

Dedicated Credit Teams in Large Enterprises

Large businesses have dedicated credit management teams for every geography or business unit. Although the team size might vary based on the organization’s strength, credit, professionals focus on credit risk analysis.

Importance of Credit Risk Management for SMEs

Today’s SMEs are tomorrow’s enterprises – mid-sized businesses are on the mission to grow exponentially to expand their business across the globe. To achieve this mission, they tend to focus on improving rather than focusing on balancing customer’s credit risk. However, credit risk analysis is neither a one-time activity nor it should be left for the end. 

Mid-sized businesses need to understand that the role of the credit management team is two-fold:

  • Credit teams are the guardians of cash: they need to effectively manage the credit risk of portfolios to ensure lower bad debt. Effective credit risk management translates to timely collection of past dues which stabilizes cash inflows. 
  • Credit teams as co-pilots of revenue growth: Credit teams should partner with Sales to identify potential cross-sell and up-sell opportunities that increase the overall revenue growth.  

This dual role of credit teams would help SMEs to grow faster, keeping the bad debt levels in check.

What are the Best Ways to Manage Credit Risk for SMEs?

Credit risk management is not a one-time deal and needs constant monitoring to control the bad debt levels. However, sometimes SMBs are not equipped with enough talent and systems to handle their portfolios, and with a growing business, this can become a significant challenge. Therefore, the best resolution here is to automate the credit management process.

How Does RadiusOne Software Help SMEs to Effectively Manage Credit Risk

To that end, we offer various modules as part of our holistic AR solution that addresses the common challenges that SMBs face. A complete AR solution would have in-built capabilities to evaluate the customer’s creditworthiness and enable continuous monitoring of the situation.

Our credit risk app helps companies manage their risk not only at the time of onboarding customers but also enables real-time credit risk monitoring. In addition, our automated credit-scoring model enables flexible scaling.

Not only that, our e-invoicing and collections app ensures that the process of sending invoices, creating prioritized lists for follow-up, calling customers, and encouraging customers to pay in their preferred format is easier. All these factors ease the process of collections and help manage the credit risk effectively.

Here’s what you can do

Credit risk management can be a challenge for any company, especially in the small and medium sectors due to the lack of resources and conflicting demands on these resources.

Here are some next steps that can help:

  1. Evaluate how you manage credit risk at present
  2. Collect the roadblocks that your team faces
  3. Collate the data on how not managing credit risk is affecting your business
  4. Look at different options to mitigate these issues
  5. Contact and talk to vendors about accounts receivable software solutions
  6. Present the most feasible solution to your team for their inputs
  7. Make the purchase decision and start the process of implementation

Want to learn more about credit risk management and how we can help you solve it. Click here.

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HighRadius Credit Software automates the credit management process, enabling credit managers to make highly-accurate credit decisions 2X faster and enable faster customer onboarding with 4 primary components: configurable online credit application, customizable credit scoring engines, credit agency data aggregation engine, and collaborative credit management workflow. Along with that, there are a lot of key features that should definitely be explored some of which are online credit application, credit information aggregation, automated credit scoring & risk assessment, credit management workflows, approval workflows, and automated bank & trade reference checks. The result is faster customer onboarding, better internal collaboration, higher customer satisfaction, more targeted periodic reviews, and lower credit risk across the company’s customer portfolio.