Credit Risk – Unavoidable But Manageable
By Tom Diana, NACM Staff Writer

Selling products or services to business customers on credit is indispensable in generating sales profits for most companies. The increasingly competitive global economy often exerts more pressures on companies to sell products on credit. However, anytime a business extends credit to another business it is taking a risk. The biggest risk is that the customer, through bankruptcy or other financial misfortune or fraud, will never pay that bill. While analyzing credit risk is not an exact science, it can help identify the accounts that pose the most risk, so preemptive measure can be taken to reduce the likelihood of nonpayment. Identifying the risk inherent in potential accounts and enlisting any existing and appropriate risk mitigation tools are what prudent credit professionals are paid to do to protect the bottom line and keep cash flow at a healthy level for their businesses.

 

A number of credit service providers have designed computer-based software solutions for approving and managing business-to-business credit. These software-based solutions utilize data and information obtained through the Internet and other sources, such as credit rating agencies and financial statements, in order to score the credit risk of a customer as well as keep track of their payment history. Such automated solutions are indispensable for companies that have a large number of accounts and must make many credit decisions quickly or even on-the-fly.

 

Veena Gundavelli, CEO of Emagia Corporation, said her company provides such a software-based solution.

• It manages the entire customer-to-cash process.
• It highlights all your problem accounts ahead of time.
• It helps you identify your risky accounts so you can proactively manage them.
• It identifies the details in your portfolio and how to manage the risk in it.

She noted her software can be resident on her customer’s server or can be accessed through the Internet. By keeping track of payment history data as well as other financial information of a business, Gundavelli said the software is programmed to alert the appropriate credit personnel of a potential account credit risk so counter measures can be taken before a payment problem materializes.

 

“We see the behavior of the customer over a period of time.” For example, if a certain customer customarily pays accounts on the 42nd day and hadn’t by then, “We would alert them on the 42nd day... the advantage of this is when you’re dealing with thousands of customers and thousands of accounts,” she added. She also pointed out her software is configurable to meet the specific credit needs of each of her company’s clients.