A client failing to comply on a payment can be harmful for micro-, small, and medium-sized commercial enterprises. Yet if a company has an effective credit risk management practice, it can still consider offering credit to its clients. This article talks about how Fidus Systems, an electronics company in Ontario, Canada, carry out its very own credit risk management practice.
Vicki Coughey, CFO and COO of Fidus Systems, observed that big losses caused by client non-payment pose unnecessary financial risks for the company. She said that it is important for a relatively small firm like Fidus to be paid. The following ways are how they practice credit risk management in the company.
1. Know your buyer
When a new buyer approaches Fidus, the first step they do is to know as much information about them. This step includes researching online using tools like LinkedIn and Google search, as well as finding business information through their several business networks and contacts. Understanding the buyers helps the company predict how the client will act, helping credit managers decide better.
2. Run a credit check
The most common buyers of Fidus are start-up businesses that have scant or non-existent financial and credit histories. In these scenarios, says Coughey, the buyer’s senior management will be interviewed to know more about the client’s creditworthiness.
3. Get a deposit before shipping or starting a project
A deposit is required before they engage in the project. A deposit will help with the business’ cash flow. It provides income to the company until it receives the final payment. It also cover expenses while the project is being done.
4. Insure your receivables
According to Coughey, Accounts Receivables Insurance (ARI) is an important part of the company’s firm credit management process. It “provides coverage against losses incurred by a company when they are unable to collect from customers that owe the business money.” Insuring the receivables made them confident because they know that the insurance policy will be there to help when the worst happens.
Coughey states that having a strong credit management process helped Fidus widen fast abroad. In fact, Fidus has already expanded to Silicon Valley in San Jose, California.
Reference: Export Development Canada