Risk Managnement-Credit Risk
Credit Risk is the most common risk facing SMEs. Clients may not always pay on time and this can disrupt businesses cash flow. Unfortunately, loans through banks don’t solve the issue. Traditional financial institutions have credit requirements that SMEs may struggle to meet.
For example, banks may require a long track record of profitability. Also, they can ask for collaterals in the form of property or machinery or fixed deposits. However, pledging or owning such assets could create liquidity risk (see below). As a result, businesses are trying to mitigate one threat at the risk of another.
Credit Risk Management Solutions
SMEs can seek trade credit insurance to shift this risk. These insurance policies cover the risk of default and non-payment of clients. They are especially useful for clients who make large orders. By ensuring the transaction, the company reduces the risk of bad debt tremendously. This bad debt could transform over time in understandable loss, thus the need to deal with this risk. In particular, trade insurance is useful when working with a new customer, whose reliability with payments is unknown.
SMEs should as well consider alternative sources of financing. One version of this could be factoring. Factoring companies can finance various businesses in return for an interest rate. Often these platforms even include trade credit insurance.
Through a factoring platform, the business presents its accounts receivables to receive financing. The financing company provides funds equal to around 80 per cent of the invoice value. Once the invoice is due to payment, the buyer (the debtor) pays the platform. The financing company then remits the balance (minus the fees), to the business.
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