SCHUMANN INSIGHTS - Securing Your Receivables in a Difficult Economic Environment

In economically difficult times, companies often ask the question: can my customers still pay their invoices? Is your liquidity tight because of your current economic situation or are you threatened with defaults on your receivables? A thorough creditworthiness check before accepting an order or making a delivery can help to reduce this risk significantly. In some cases payment in advance can be the right measure to limit risks.

Due to the economic situation, your industry or your company's own product portfolio, the credit lines agreed by your credit insurance company may not be sufficient. When the resulting additional risk cannot be accepted, some insurance companies offer so-called "top-up policies" – for an extra charge, of course. This is a further security measure that can increase the credit limit for particular customers significantly.

Companies that have a sophisticated credit risk management system at their disposal, in which a clearly defined credit policy and appropriate IT support are available, can consider an excess of loss policy. With this type of policy, the credit insurer evaluates and approves the credit policy of the company, and the creditworthiness checking process is then performed by the company itself. The policy excess, which the company has to cover itself in the case of a loss, can be agreed at a higher level. This kind of policy can work out much cheaper overall.

A further variant in which the receivables risk can be passed on is real factoring, in which the factor buys receivables that have been evaluated before taking on the business. It is thereby not only a transfer of risk that takes place. There is also a liquidity effect because the factor pays the receivable immediately and thereby pre-finances it. Liquidity can also be especially important in times like these. It should also be considered that in economically difficult times payment periods are likely to extend. This puts even more pressure on the supplier. Therefore, factoring is a further alternative that should not be underestimated.

Which option for risk minimization a company chooses depends on multiple factors: its own financial situation, the ability to carry risks and the costs associated with this. There are various financial instruments available that can be tuned to the respective initial situation. Ultimately, it is all about being able to continue doing business in a difficult economic environment and minimizing the risk of default on receivables as well as securing one's own liquidity.

In uncertain times economically, proactive measures for securing receivables are decisive in order to recognize risks as early as possible and to reduce them. Through a clever combination of creditworthiness checks, credit insurance, top-up policies, factoring and excess of loss policies, companies can reduce their risks and strengthen their financial situation at the same time.