What is credit protection and how does it affect you?

In the world of corporate finance, the term “outstanding balance” refers to all amounts of money that are due, but which have not yet been paid and are owed to the creditor by the debtor. Managing outstanding balances is a complex but crucial aspect of good business and can have significant knock-on effects for the financial health of the company.

When it comes to measuring the financial health of a business, one metric which is commonly used is the company’s ability to collect its outstanding payments. If a company is failing to collect its outstanding payments in a timely manner, or if it is failing to settle its own outstanding debts, this often serves as a warning sign for creditors and investors.

For that reason, it is critical for any successful business to track and collect or settle their outstanding balances at an appropriate time. The financial future of the company can depend on this.

Credit protection is a way for companies to protect themselves against the risk of non-payment or default by their customers. 

A business concerned about the risk of default or non-payment can draw up an agreement with a company such as Allianz Trade in Canada to provide credit protection services. This means that even if the end customer defaults or becomes insolvent, the business is not left out of pocket.

Taking out credit protection can bring peace of mind and much-needed security to companies who are highly dependent on customer payments being made on time and in full. This allows them to continue operating and developing even if customers are late or defaulting on their payments.

Credit protection is an essential component of a well-constructed credit and risk management strategy. When prepared and applied diligently, it can help reduce the risk of bad debts and financial losses, thus safeguarding the present and future of the business. 

By encouraging timely payments, cash flow can be maintained and freed up for ongoing operating costs or invested in new opportunities.

By developing and maintaining healthy working relationships with customers, businesses can guard against payment disputes. When difficulties are resolved amicably, this builds customer loyalty and can encourage repeat customs and grow the business’s reputation.

There is no substitute for good financial planning and upstream credit risk analysis. A comprehensive credit protection strategy extends from running customer credit checks prior to extending credit, to tracking and monitoring payment terms, to resolving credit disputes and chasing late payments.

And as with any business activity, there are challenges and risks inherent in implementing a comprehensive credit protection strategy. The costs associated with running credit checks, taking out insurance premiums, and outsourcing debt collection services can add up and should be considered carefully.

Strict credit protection measures can also impact sales. Inconvenient credit policies may deter potential customers and inflexible procedures can lead to lost sales opportunities. Furthermore, stringent credit policies do not consider risks around emergency situations such as operational disruptions, supply chain interruptions, and natural disasters.

And, of course, it is also vitally important to ensure that credit protection policies comply with applicable legal and regulatory requirements. Taking guidance from a company providing reputable credit protection advice is recommended.

A comprehensive credit protection strategy can be broken down into a series of steps.

• Step 1: Assessing credit risk.
  Before extending credit to any customer, probing credit checks should be carried out, to minimize the risk of non-payment or late payment. Checking creditworthiness by research credit scores, verifying references, and sounding out peers and market reputation can help reduce risk.
  
  
• Step 2: Choosing credit protection measures.
  Not all risks are equal. The risk of an occasional customer defaulting on a small invoice is different from the risk of a major account involving a large order. The measures taken to mitigate these different risks will vary depending on the context, the history with the customer and the assessed risk. Taking out trade credit insurance may be the most appropriate option for certain major credit risks which could prove to be critical for the business.
  
  
• Step 3: Establishing clear credit management policies.
  Credit policies or credit controls primarily focus on the four following factors:
• Credit period
• Cash discounts
• Credit standarts
• Collection policy
  
   An unambiguous and transparent credit control policy outlining payment terms, dealing with debtors, and including guidance on overdue payment fees and advance payment discounts can help avoid certain risks.
  When credit terms and policies are clearly laid out and diligently enforced, both parties to the agreement can navigate the credit relationship comfortably.
  
  
• Step 4: Monitoring and reviewing.
  As with so many aspects of business, agility is key and the ability to adapt and respond to changing circumstances is the hallmark of good business. Restricting customers to the initial credit check process is not enough. It is important to review your customers’ credit ratings on a regular basis, as their financial situation can change over time.
  
  Credit policies and procedures should be regularly reviewed to ensure they are compliant with changes in the legislative and regulatory framework, but also that they are meeting the company’s credit management requirements
  

To conclude, credit protection is a key component of a company’s risk management arsenal and can help mitigate against the risk of non-payment, overdue payment, and bad debts. Taking a comprehensive approach to the risks and challenges associated is important. 

In some circumstances, credit protection insurance may provide a business with the safety net they need to confidently engage in transactions which may otherwise prove to be too risky.

Flexibility, review, and agility are key to ensuring that any credit protection strategy remains appropriate and responsive enough to meet new needs. Allianz Trade can provide guidance on building an appropriate credit protection strategy to ensure yours is optimized and fit for purpose.