Implementing the Proper Credit Risk Management for Your SME: The How’s You Need to Know
Small and Medium-Scale Enterprises (or SMEs) are considered as a vital force in generating employment and national income for economic growth and employment. This is mainly due to their ability to adapt to market changes and their capacity to grow with today’s innovating trends in industry and technology. However, studies made on SMEs revealed that very few SMEs have been able to graduate to larger enterprises. The reason: the lack of access to financing and credit opportunities which, on other hand, is not an issue for large enterprises. Financial resources enable SMEs to make investments in labor and capital to improve efficiency, productivity, and competitiveness. Thus, sufficient access to credit is a given for any SME regardless of the industry or geographical location it operates in.
SME owners must be aware of the importance of knowing and understanding their business credit profile with lenders when it comes to securing a business loan. Let's examine why.
What is Credit Risk?
Credit risk is the risk of default i.e., a borrower failing to make the necessary payments on a loan. It is the biggest source of risk that all banking institutions are mandated to assess. Businesses need to assess credit risk as well when they prior to extending credit to their customers. They need evaluate the risk of non-payment when selling to other businesses. They also need to make sure that they can rely on their suppliers when it comes to filling their orders so as not to fail supplying their own customers. Clearly, the extent to which credit risk is managed will make or break any kind of business.
What is Credit Risk Management?
Credit risk management is the practice of reducing financial losses by holding credit risk exposure within acceptable parameters.
Credit risk management is the discipline of minimizing credit risk through a better understanding of a bank or lender’s rate of return in light of probable losses by maintaining adequate credit risk exposure within acceptable parameters. A keen appreciation of the importance of credit risk management will allow business owners to be more aware of what to do to mitigate such risks but will also allow them to view themselves in the eyes of potential lenders.
By implementing proper credit risk management they will be able to better manage their finances and operations. Additionally, understanding the value of credit risk management can help SMEs make better decisions-- either as borrower, creditor or supplier-- that will benefit their business and ensure its sustainability.
CreditBPO and Proper Credit Risk Management
In order to properly manage credit risk, you'll need to be aware that social (e.g., personal or family problems of the business owner), political (e.g., changes in government policies), economic (e.g., cyclical contraction in the industry), and environmental factors (.e.g., natural disasters) may disrupt a business' operations that could lead to failure to pay off loans.
To minimize your credit risk, you have to:
Get to know your customer, starting from the overall company down to the key people running it. Don’t just extend credit to anyone who asks.
Define your credit policy and strictly set out payment terms, credit limits and due dates based on historical payments of your customers.
Encourage timely payment by regularly sending invoices and indicating penalty charges. At the same time, make sure that invoices are done right to avoid excuses and delaying tactics due to some error on your invoice.
Regularly information about your customers, supplier, and competitors and validate any potential risks you need to prepare for.
SMEs need to evaluate their suppliers and customers in an effective way to be able to address any operational and credit risk. Banks, leasing and financing companies, franchisors, lending cooperatives, insurance companies and big corporations understand the value of a reliable and consistent credit rating policy that will allow them to properly evaluate the creditworthiness of the companies they regularly deal with.
CreditBPO provides that information through the CreditBPO Rating Report®. It’s important to remember that being an SME does not mean you don't have access to the tools that larger companies use to improve credit management. You, too, can leverage and make use of what today’s technology offers through CreditBPO.