Global economy is entering a period of strong new growth and this is happening especially in emerging markets. Asia is currently responsible for a third of the world’s GDP, while Africa is turning out be a great emerging economy in the world followed by South American middle class growing leaps & bounds.
But the single most serious issue that can affect credit risk is not getting paid which may be due to customer bankruptcy or government imposition of currency control.
Hence we need to follow these 7 basic ways to reduce the risk of not getting back your money
- Thorough check of new customer’s credit record.
Find local help in determining the credit history of the customer so that it could help you determine your customer at large and reduce the risks associated due to bad debts.
- Use the first sale to start building customer relationships
Build a long term relationship with the customer. Sometimes it may take years to build it but start laying the groundwork by discussing the credit term with the customers before extension of credit is achieved. This will help you gauge the customer’s attitude towards credit & ensure a clear understanding of what is expected out of him.
- Establish Credit Limits
Use tools like Credit agency reports, bank reports & audited financial statements which will give you a very clear picture of how the system works and the risk appetite of the customer
- Make sure credit terms of sales agreement are clear
A sales agreement well worded with the comprehensive terms of credit & details will help you minimize the risk & improve the chances of bad debts.
- Use credit &/or political risk insurance
- Usage of factoring
- Developing a standard process for handling an overdue account
As soon as you find the routine of late accounts and non payments the best strategy would be to create a collection process as soon as the problem is being identified. In short we just have to nip it in the bud. Chances of collection of delinquent account are highest in the first 90 days after the due date.