Alex Lacreu is Head of Risk Underwriting for Coface North America, leading an expert team of risk underwriters in the U.S. and Canada.
*With over 75 years of experience and the most finely meshed international network, Coface is the reference in credit insurance, risk management and the global economy. Coface helps companies in their credit decisions and supports their growth around the world. Our services and solutions strengthen companies’ ability to sell by protecting them against the risks of non-payment in their domestic and export markets.
The pandemic and war in Ukraine have brought unprecedented challenges to business operations and risk management across the globe, and, for many, the stakes could not be higher. As a leader, understanding and utilizing the practices and protections within your control can make the difference between coming out on top or closing your doors. Coface North America’s Head of Risk Underwriting has outlined best practices and tips to help create some certainty, even in the most uncertain of times.
Even when economies, supply chains, and countries are secure and stable, business risk can be hard to predict. It takes a special understanding of how industry trends, financials, macro and socioeconomic factors, and more, work together and influence the overall risk of a business decision. With these inherent complexities, it’s no wonder many businesses turn to outside risk experts like myself to help advise them on how to avoid some of the unforeseen pitfalls of doing business.
Shifting monetary policy and the supply chain’s fluctuation from bottleneck to oversupply may leave you feeling whiplash
As the Head of Risk Underwriting for one of the world’s largest trade credit insurers, it’s my business to make sure yours survives. That might involve providing underwriting services and policies like of trade credit insurance to protect your business. Or it could come from advising about best practices and behaviors that can deliver stronger financial and credit decisions. CFOs and corporate credit managers have significant influence over the health of their businesses. This influence must be leveraged during times of stability as well as during moments, like now, when environmental, economic, and social unrest are volatile and evolving realities.
Improving What You Can Control
Shifting monetary policy and the supply chain’s fluctuation from bottleneck to oversupply may leave you feeling whiplash. Despite current headlines, charting a path to stronger financials can be within your control— and could not be more important. We see credit becoming more expensive and insolvencies on the rise. In this climate, many companies with limited capital and loose credit risk practices could face difficult situations.
But that does not have to be you.
Closely monitoring credit risk starts with evaluating your existing procedures. Things to consider are the frequency of your review, what information you gather, what your response strategy might look like, and how long it will take you to implement improvements. This is a time where exceptional due diligence with new customers is needed. Heighten vigilance by monitoring payment trends. Early detection is key because it allows for rapid response to reduce terms or initiate accommodations like letters of credit or guarantees.
For the most sensitive customers, stopping shipment when you record any past due accounts may be appropriate. You may also consider payment-in-advance options. Another strong protective move is obtaining credit insurance. These policies can protect you if your accounts receivable are one of your company’s largest assets, or if the credit quality of a customer isn’t entirely certain. It can also help you weather nonpayment events; this can be particularly valuable to businesses that can’t absorb severe or frequent small claims that may amount to a larger sum. Credit insurance comes in variety of packages that can meet the needs of companies of all sizes.
Strengthening Your Credit Profile
For many companies, your relationship with your supplier is one of, if not the, most critical. Optimizing your financials can produce a variety of benefits in the short and long term. In order to capitalize on the right advantages for your organization, you might consider:
• Avoiding excess inventories. If you can’t move your inventory, or the demand has shifted, you may consider discounting or cancelling orders to help reduce excess. Many companies may also benefit from exploring inventory financing solutions.
• Seeking longer payment terms from suppliers. One way to do this is by sharing, confidentially, additional financial information with key suppliers. While this information is sensitive and shouldn’t be shared with just anyone, it can help build confidence and negotiate more favorable terms with your most important suppliers.
If your credit profile is strong, you may also explore supply-chain finance as an opportunity to extend terms and potentially improve margins. By paying cash directly to your supplier you may be in a position to negotiate discounts.
• Considering Accounts Receivable financing. This approach has grown in popularity over the past two decades and has become another way to optimize financials. Accounts Receivable financing can increase liquidity and working capital by allowing companies to receive early payment on outstanding invoices. Depending on the financing, this approach can also improve your balance sheet.
There are three main types of this financing, which offer varying flexibility and advantages. They include asset-based lending, factoring, and selective financing. Exploring these options and whether they are right for your business may help further equip your accounting practices to meet your short or long-term financial needs.
• Keeping sufficient liquidity cushion. Another area risk experts often assess is a company’s liquidity or credit capacity with their bank. Finding the right balance for this is important so you don’t pay excess fees for unused credit. For medium and large companies, a confirmed multi-year credit facility may also have advantages.
As a CFO, you understand that balancing both sides (and the demands) of the supply chain can be challenging. Take reassurance in the fact that many behaviors that can help optimize and improve your financials are within your control. Be proactive about addressing your needs and relationships as both a client and a supplier. While there is no Magic Eight Ball for risk (not yet, at least), the proactive steps you take to understand and secure your business operations can help build confidence in your future.
And when risk expertise is needed, outside counsel from credit and risk specialists can help prepare a comprehensive, customized strategy to help safeguard and provide protection to grow.
