Credit Risk Management

Best Practices & Solutions

Any time you provide a product or service to a client and later invoice them for payment, you undertake a risk that you won’t be paid. Effective credit risk management is imperative to the success of your business.

What is Meant by Credit Risk?

When you invoice clients at a later date after providing goods or services, you take a risk that the client will not pay on time or default on payment. This can disrupt your cash flow and reduce your profit.

Taking a risk by extending credit is not necessarily a bad thing. By doing so, you can encourage a client to spend more with your company or stand apart from competitors who don’t offer credit. But you should extend credit only when you have effectively assessed a potential client’s creditworthiness.

Businesses that are considered high-risk include those that are relatively new, those that have no credit history or those that have poor credit ratings. In addition, certain industries are considered high-risk for financial failure. Visit our Sector Risk page to get up-to-date analysis of credit risks by industry.

What Are the Different Types of Credit Risk?

Typically, credit risk falls into three categories:

  • Credit default risk refers to the chance that a client will not pay your invoice. Any time you provide goods or services and invoice for them later, you undertake a credit default risk.
  • Concentration risk refers to extending a high amount of credit to one large client or to a group of clients whose invoices represent a significant part of your revenue. A high concentration risk exposes you to losses that could significantly impact your cash flow.
  • Country risk refers to the exposure your business takes when doing business internationally. Country-specific credit risks are affected by fluctuations in currency exchange rates, economic or political instability, the potential for trade sanctions or embargo, or other issues. These are all factors that can negatively impact the business environment and cash flow in and out of the country where you do business.

What is Credit Risk Management?

Business credit risk management is the actionable plan you use to guard against late payments or defaults. It helps protect your business’s cash flow and improves performance. Business credit risk management is a continuous process of identifying risks, evaluating their potential for loss and strategically guarding against the risks of extending credit. Because credit risk management is proactive, it helps reduce the possibility of a default and its impact on your organization.

Best Practices for Credit Risk Management

Effective credit risk management practices differ from business to business. Experts agree the following general best practices can successfully guide any business in managing credit risk. They include identifying the risk of a new client defaulting on payment, analyzing the risk and creating a proactive plan to mitigate credit risk.

Identify the Risk

You can identify the potential for credit risk of a potential new client by reviewing data about the company from the local Chamber of Commerce, credit bureaus, bank and trade data and the company 10k. This data can help you better understand your potential client’s creditworthiness and help you decide if you should extend credit and with what terms.

Euler Hermes can help. We offer a library of research about sector and country risks that can help inform your decisions about extending credit. In addition, we can leverage our credit-risk grading model to help you forecast credit risks and potential customer defaults.

Analyze the Risk

Whenever you consider extending credit to a client, you must analyze two things: the client’s creditworthiness and the potential impact on your cash flow should the client default. By doing so, you develop an important structure for credit decision-making.

Euler Hermes is uniquely positioned to support clients’ credit risk management and credit risk analysis requirements. Our SmartView platform is a risk-monitoring service that gives Euler Hermes customers immediate visibility over trade receivables and a better grip on risk and opportunity management. You gain valuable insight on the financial health of your customers via a wide range of risk reports. Plus, you can also keep track of your customer’s creditworthiness and capture growth opportunities.

Create a Proactive Plan

Good credit risk management requires a plan that will help you evaluate and extend credit for all clients. First, determine the credit terms – the amount of credit you are willing to extend and for how long. Discuss these terms with new clients before you extend credit. Then, conduct monthly or quarterly reviews of your accounts receivables to maintain a clear picture of your risk.

Euler Hermes can help in the decision-making process around tough high-risk credit decisions, including credit insurance that can help protect high volume/low margin accounts. In addition, the Euler Hermes CAP, CAP+ and Power CAP programs support strategic decisions on higher-risk domestic and export market clients while maintaining sound financial management.

Best-in-class Solutions for Credit Risk Management with Euler Hermes

Successfully expand your business or protect your key financial accounts with help from Euler Hermes. Choose the credit risk management solution that is right for your business:

  • Energy Solutions: Our tailored risk management solutions for the energy industry help companies effectively manage receivables risk.
  • CAP: The Euler Hermes CAP product suite offers credit insurance endorsed to your existing Euler Hermes policy for additional coverage on credit limits that have been fully or partially declined.
  • EZ Cover: Cover A/R risk on any new customer not named in your Euler Hermes credit insurance policy.
  • DUO: Gain the best of both worlds with non-cancellable trade credit insurance.
  • Corporate Advantage: Gain the protection over trade debt in both domestic and export markets.
  • Non-Cancellable: Non-cancellable trade credit insurance solutions are powerful tools to help your business grow safely.
  • Excess of Loss: Designed for multi-national companies with mature credit risk management, this solution offers non‑cancellable credit limits and country limits for 12 months.

Trade Credit Insurance for Risk Management

Averting loss due to a client’s inability to pay is difficult to predict. Evaluating a client’s credit risk prior to extending credit terms is a good way to lessen that risk. But because the business environment is constantly in flux, this can be a difficult undertaking.

Without an effective risk management plan in place, your business can be exposed to cash flow and revenue problems that affect your daily operations. When you insure your accounts receivable with trade credit insurance from Euler Hermes, you can count on being paid even if one of your accounts faces insolvency or is unable to pay. In addition, trade credit insurance from Euler Hermes comes with the added benefit of the support necessary to make data-informed decisions about extending credit to new clients or increasing credit to existing clients.

Connect with Euler Hermes to learn more about how trade credit insurance can help your business.

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