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Customer Credit Strategy: Safeguarding Working Capital During a Crisis

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For B2B sellers, the right mix of credit policies and use of crisis-period buyer data can go a long way toward supporting customers’ purchasing needs while also safeguarding a seller’s working capital, writes Brandon Spear, president of MSTS.

Extending credit to customers can be risky, and even more so in the midst of a global crisis. As a B2B seller, you have to weigh your options right now: Do I continue to support customer needs by extending credit? Or do I protect the finances of my business during an uncertain time?

For some, the choice is out of their control. During an economic downturn, sellers may not have the working capital necessary to extend credit, whether it’s because they’ve exhausted all other sources of financial support or are simply unable to qualify for a Paycheck Protection Program (PPP) loan.

Fortunately, there is another option. By approaching credit extensions strategically, B2B sellers can still support buyers’ purchasing needs with the peace of mind that working capital remains safe. New strategies for underwriting and managing customer credit lines are necessary for striking this balance.

Underwriting during a crisis requires new data sets

In an economic crisis, safeguarding working capital against the risks of extending credit requires a closer look at buyer data—traditional underwriting methods are no longer sufficient.

Underwriting a new customer traditionally hinges on historic buyer data, but that doesn’t provide the full picture of a buyer’s financials—especially in an economic climate defined by fast, unprecedented change and future uncertainty. Instead, pivot to leveraging data that evaluates how the current crisis has affected a buyer’s industry and how long it will continue to impact it. This includes leaning on current and predictive industry-specific data sets that answer the following questions: What is the financial landscape for that sector right now? What do the models predict for the future?

While historic data still offers valuable insight into how the business operates, forward-looking data completes a buyer’s financial picture. Use this data analysis approach to make informed decisions about the financial health of a buyer in the months ahead.

Managing customer credit lines with right-sizing in mind

In an uncertain economy, right-sizing your customer credit lines is a smart way to safeguard working capital. Analyze past purchasing behavior to accurately determine how much credit customers require to support their purchasing needs, and then adjust the line accordingly. For example, if a customer qualifies for a $200,000 credit line but purchases less than $100,000 worth of product or services each month, reduce the credit line to $130,000.

Use right-sizing to reduce the risk of bad debt without impeding customers from purchasing what they need to run their businesses. Right-sizing also gives your accounts receivable team a helping hand by reducing the days sales outstanding (DSO) and making it easier to manage overdue invoices. With more accurate credit lines, customers are more likely to prioritize payments in order to keep the credit line open.

Exploring other ways to safeguard or access working capital

If the risk of extending credit to customers during a period of economic uncertainty is too high, or you simply don’t have the capital, there are additional options. Here are some quick-win methods for protecting working capital and more intuitively managing customer credit lines during a crisis.

  • Accelerate collections times. It’s not uncommon for accounts receivable teams to collect payments only when they are past due. However, this can create working capital issues later on—especially when finances are strained. To ensure there is no trouble with working capital down the road, back up your collections timeline so the process starts before the payment due date arrives.
  • Alternative funding solutions. If extending credit to customers just isn’t an option, research trusted B2B commerce partners with core competencies in handling credit management and extensions for you. Most importantly, by outsourcing these tasks, you also outsource any risk involved.
  • Paycheck Protection Program. The PPP can be a lifesaver for businesses that qualify. The government assistance program supplies cash for rent and payroll, which means working capital is freed up for other business needs. Monitor the official website for the latest information on this loan. The SBA is still accepting applications for the program, but the status could change as the pandemic continues.

More strategic underwriting and credit management protects working capital, and also builds and strengthens buyer relationships. During uncertain times, it’s critical to serve as a strong, reliable commerce partner for buyers. By adhering to best practices, you can create loyal customers that know they can depend on your company to keep their own businesses moving forward.

This article, written by Brandon Spear, was originally posted by Digital 360.

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