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“Buy now pay later” is a proven business model that allows companies to retain their competitive edge in a challenging market. Retailers and other businesses across the world are increasingly offering B2B trade credit and alternative payment options.
While offering credit gives your business multiple advantages, it is important to know how to mitigate the risks of delayed payments.
Apart from allowing businesses to gain a competitive edge, offering credit is a great way to encourage B2B customer loyalty. Credit offers a convenient way for businesses and suppliers to make payments and shows that your business trusts and values them. This helps build a strong, long-term relationship with these customers.
When companies get credit extended on good terms from your business, it can encourage loyalty. These companies are more likely to prefer your business for their future requirements. If you offer more favorable B2B credit terms as compared to your competitors, you can draw more B2B customers towards you. In addition, you can solidify your competitive edge by offering trade credit to businesses that are not looking to take a business loan.
Your B2B customers gain more purchasing power as a result of your trade credit. This means they can afford to buy more of your services or products, leading to stronger sales volume, larger customer base and increased profits.
Clearly, offering business credit offers considerable competitive advantages for businesses.
For growth-oriented businesses, offering credit is a proven way of scaling their client base and sales volume. Given the risks inherent in this approach, businesses need to carefully balance the potential for higher sales against the risk to their cash flow.
According to Illion‘s research data, payments in Australia are late by an average of 10.4 days, reflecting that Australian businesses receive their payments almost 11 days overdue. According to another estimate, payments are delayed by 26.4 days on average. With a 30-day credit term, this translates to a two-month payment delay.
A new survey reveals that businesses write off 5% of B2B sales based on trade credit as uncollectible. As per this survey, delayed B2B payments increased in 2020, with 54% of firms reporting past-due invoices.
This ‘delay,’ which leads to a constriction of cash flow, is the reason for the failure of so many small businesses. Small businesses in Australia are owed $26 million in unpaid invoices. Business owners spend an average of 12 days a year collecting their dues. To counter this, business owners clearly need strategies – such as better credit control, AR automation, integrated online payments, and the ability to review debtors’ risk profies.
These issues can combine to increase the risk of business failure. Per an estimate, 90% of small businesses in Australia fail because of cash flow problems. In a report, the ombudsman of Australian Small Business and Family Enterprise highlighted that small businesses are owed $20,000 or more in late payments. About 14% are owed $100,000 or more as late payments.
Cash flow problems have ripple effects on all aspects of running your business, impacting your ability to pay your suppliers on time. This can prevent you from taking advantage of any early payment discounts while damaging your reputation.
Most businesses lack the resources required to chase down their payments. Given the day-to-day tasks of running the business, most businesses have very limited time to dedicate to chasing the payments they are owed.
Balancing these risks against the multiple advantages of offering credit requires a strategic approach. While conducting a credit check on your B2B customers, setting clear payment terms is vital. A comprehensive credit application form can help you capture crucial information that you can leverage to assess credit suitability.
Based on your assessment, you can specify different payment terms for various B2B customers. For instance, you can offer longer credit terms for reliable suppliers while asking upfront payment for those who habitually delay their payments. You can also set a credit limit which is the maximum credit amount your business will offer. Defining the credit limit helps ensure your accounts receivables are funded and protects your cash flow. Based on the credit history or payment history of B2B firms, you can choose to specify the credit limit for each customer.
A digital credit application form simplifies the process of applying for credit and getting approved while reducing errors in specifying credit terms.
Contact Information – The mandatory field in the form captures vital contact details, including the business name, shipping and billing address, tax identification, the business owner’s contact information. The credit application form must include fields to capture:
Business details – Your credit application form needs to capture full business details to ensure you know whether you are dealing with a trust, sole trader, association, company or partnership. Make sure the form captures these specific details of the business:
Financial information – This information is vital to assess the firm’s ability to pay you. Ensure the credit application form captures these details:
Trade references – The form should capture trade references from a minimum of three other suppliers and their contact details ( full business name, mobile number, ABN, and email address).
Directors’ Guarantees – Ensure the credit application requires individual directors of companies to provide a written guarantee that they will clear the debts in the event their company is not able to pay. In case the business goes into bankruptcy or liquidation, you can hold the directors responsible for the payment of outstanding debts. Your credit application form needs to capture contact details, such as email address, mobile number, and street address of directors.
Payment terms – Set the payment terms in the credit application form in direct, simple, and unambiguous language to avoid misunderstandings and disputes. These fields should specify
Terms and Conditions – This is a vital section in the credit application form that ensures your B2B customers have read and understood your terms and conditions. Your company’s credit team and legal teams can work together to form a credit policy and specify these terms. For instance, it can include that your company will perform a credit check and make a decision on extending credit after
This section can also include information on
If you decide to extend credit, ensure you specify the credit limit, default terms or the penalty, credit terms, and other conditions. You can also include a section on the collections methods you will use. This explains the actions your business will take if the firm fails to pay. Businesses typically will send an invoice initially, followed by reminders, and if this fails, they can take legal action and engage a collection agency to pursue payments.
Offering B2B credit and ensuring you receive payments on time can be challenging without a streamlined process. Download the free online credit application template to make the process seamless and error-free.
You can also use our Credit Insights & Online Credit Application platform – try it out and get 3 free business credit scores
Get business credit scores and a free online credit application template - give your customers a great onboarding experience and manage your risk
No credit card required
Offering credit to your customers is an effective way of encouraging them to spend more on buying your products or services. In some industries such as wholesale, trade, or distribution – credit might be a requirement for doing business. Extending credit to your B2B customers could also help your business gain a distinct competitive advantage in your market.
While providing credit is good for your business growth, it exposes you to the risks of late payment and at times, non-payment. While this significantly impacts your short-term cash flow, it can also hurt your bottom-line and business growth in the long run. While some business owners may think they are not offering credit, they may already be doing so by sending an invoice after the goods or services are provided to the customers.
Balancing the risks of cash flow reduction and increased sales is the key to robust credit management.
If you offer any other invoice terms not based on cash on delivery, it creates a risk that the customers may fail to pay on time or fail to pay altogether. For instance, if you offer 30-day terms, it translates to credit of 30 days. If that timeframe extends to 45 days or 90 days, the credit gets further extended and increases non-payment risk.
However, with some customers who have a strong and long history of making full payments on time, the credit risk may not be significant. Despite this, there is a risk, even if slight, that your next invoice may not get paid due to a change in the customer’s circumstances or other factors (You can track these in real-time with Credit Insights from ezyCollect). Although these external factors may not be under customer’s control, the outcome is that their inability to pay on time affects your cash flow and eventually, your bottom line.
The first step towards effective credit risk management is understanding your business’s overall credit risk. This helps businesses reduce losses and build up capital reserves. It is crucial to implement a smart, integrated, and informed credit risk management strategy.
Building trust is the most critical factor when extending credit to another business or customer. While it is always a great idea to start with ‘cash sales’ with a new customer, you can navigate towards credit offerings when the customer has built a strong payment history and inspires the desired level of trust.
There are three key drivers of growth in a business- product, sales, and cash collection; however, the third one rarely receives the attention it deserves. Businesses often focus on sales/marketing and product – while taking cash collection as a given. The success of many B2B companies depends on their ability to manage the receivables collection function efficiently. And this is a function that deserves more attention, investment, and, dare we say, credit than it usually gets.
When you sell a product or perform service on credit, you are also in the B2B accounts receivables collection business. The financial health of your company depends on how well your business can collect on sales. Unfortunately, it is often performed with inadequate forethought to the systems, staff, strategy, and tactics to deliver exceptional results. And businesses find that their customers are using them as a bank, with many overdue invoices impacting the cash flow and growth prospects of the company.
Here we will look at how it is possible to increase your company’s cash flow performance with better planning, execution, and technology
Credit, or rather the lack of credit-risk strategies, can often lead to bad B2B business debts. The problems can intensify with the lack of efficient operating models and insufficient management focus.
Many businesses do not implement a robust framework for credit-risk assessment. They do not follow the global best practices that reduce customer delinquency and debt collection. Not accounting for credit risk can lead to unhealthy business growth. It expands the customer base but depresses the profitability.
Companies with a credit risk framework often do not monitor pre-delinquency or follow the same approach for each bad debt. These companies seem to follow the same settlement strategies for all delinquents instead of adopting a customized approach for each such customer.
Most companies do not have a specialized debt collection team, and they mostly rely on external agencies for the same. Some outsource this job to call-center agents who lack proper training to assess a customer’s situation. These agents, thus, fail to provide the right settlement options to these customers.
When the responsibility for collections lies between multiple departments, it is difficult to establish clear ownership of credit risk. Often, such companies lack staff that specializes in credit and risk management.
Top executives seem to be more occupied by transformation, innovation, and digitization that accounts receivables & collection is usually not in the spotlight. Bad debt figures don’t often feature on the agenda, making it harder to improve the situation.
Bad debts are never good for a business. They affect company finances as well as the accounting process. Bad debts often complicate the accounting process making it difficult to comprehend when a sale was completed. Accounting for an unpaid sale requires a variety of collection and reporting procedures.
Preventing bad debts is essential not just for the company’s financial health but also to minimize reputation and relationship risks from the collection process.
Debt management is vital to a business as it ensures that the company has enough working capital to reinvest and grow. Effectively managing debt requires some thought and planning and can be controlled with these simple steps.
Most businesses have an informal arrangement for supplying goods and services. Not having clear, written terms of trade can lead to several disputes creating bad debts.
B2B companies require a firm credit policy to ensure their continued growth. Before offering credit to new customers, companies should conduct a thorough credit history and business reference check. Document the terms of business and the credit limits, and initiate business only when your customers understand, accept, and sign the business terms.
Implementing new payment terms and conditions is better done with new customers or those looking to extend their credit limit. Introducing new terms to existing customers could upset them and affect their loyalty.
Customers are more likely to pay you on time when you provide them with the right information on documents and invoices. Disputes can create bad debts that can significantly impact the business.
All your documents- quotations, invoices, contracts, purchase orders, and estimates should refer to your terms and credit policy. Make sure that the invoices and financial statements clearly show the amount due and the due date. The company’s billing address and bank account details should also be present on such documents.
It is a good idea to check with the customer if they need any additional information to expedite the payment. Indicating collection charges for overdue accounts on your invoices and statements can discourage late payments.
Well-maintained information is the key to good debt management. There are many credit management software solutions available in the market that can ease your company’s debt management process. These software solutions can closely monitor your debtors’ ledger and keep track of the outstanding payments. These solutions also offer regular reporting to help identify trends and patterns before they can impact your business’ cash flow.
One of the simplest hacks for getting paid outstanding invoices paid quickly is to add a multitude of payment options (credit card, bank transfer, cheques) – from a ‘Pay Now’ button on your invoice to enabling debt financing solutions – where you customers can get the outstanding invoices financed and pay you while they manage the repayments. The simple philosophy is to provide no excuses for your customers to not pay you – something which we adopt here at ezyCollect as well.
Accounts Receivables automation modernizes the accounts receivables process through automatic, electronic systems that decrease repetitive and time-consuming tasks. It frees up time for your accounts receivables team to chase payment and get the cash in to mitigate bad debts, rather than wasting time on printing and posting invoices.
AR automation improves the accuracy of invoicing details, leaving little to no room for an excuse for late payments. The AR team gets more time to chase payments and handle exceptions making collections fast with less delinquency.
Strengthen your delivery systems and implement the practice of keeping signed dockets as proof of delivery. When you automate the AR process, it becomes possible to send invoices ahead of time, discouraging customers from making late payments. It can also send automatic reminders when customers deviate from your trade terms.
Review the credit limits of your customers regularly. Look out for warning signals which could indicate that they may be facing financial problems. Check on all customers, even the long-standing ones, to monitor changes in buying habits or an increasing level of debt.
Wherever possible, refrain from doing business only with one substantial customer. Customer concentration risks outweigh the benefits. Be careful of customers who are expanding rapidly as their business growth can sometimes affect their ability to pay. Do exercise caution when handling requests for extending credit.
Stop supplying to customers who do not pay their accounts on time. Initiate a discussion about the situation and try and reach a settlement for payment of past supplies.
The core of a sound onboarding practice is to ensure that potential clients can pay for your goods or services. Implementing complete business credit checks allows you to access a client’s payment history, giving you useful information about their ability to pay, now and in the future. When you know a client’s potential payment pattern, you can make an informed decision if and how you would like to conduct business with that customer. The existing process of getting trade references and having your customers and sales teams fill out forms isn’t the most effective one – you might consider investing in a service or resource that can complete comprehensive business credit checks for you rapidly and help you transact with the right customers for your business
When you have insight into how a potential client manages financial responsibilities, you can make amendments to your payment terms and credit limits. Customizing payment terms for different customers helps safeguard your business from unreliable clients and cuts down the risk of bad debts. For instance, if a credit check indicates that a potential customer is a payment risk, you may front-load the payment terms or not offer credit at all.
Credit checks can be invaluable to mitigating risks and protecting your business from potentially expensive mistakes.
B2B businesses face several challenges when collecting outstanding payments from delinquent customers. Developing a well-structured process, leveraging digitization, and upgrading your teams’ resources and capabilities can maximize recoveries and prevent bad debts. With an increased focus on debt management, companies can reduce high costs and lost income and enhance customer focus, customer engagement, resilience, and profits.
You’re probably familiar with the personal credit score as a measure of a consumer’s ability to repay a loan. Likewise, the business credit score is a measure of a business’ credit health. When a business needs to borrow money, a creditor will assess the condition of the business’ credit status before issuing terms.
A business credit score is a number (or numbers) that indicate the creditworthiness of a business. A company’s credit score is calculated from commercial information—mostly financial information—available on its credit file. A business credit score tells creditors how likely a business is to pay its bills on time.
A business credit score is a numeric indicator that is amalgamated from detailed information available in business credit report.
If your payment terms to customers include trade credit, you’ll want to know upfront the likelihood that your customer will repay you on time. A business credit score provided by a credit reporting bureau will give you a credit assessment based on amalgamated market data.
Traditionally, suppliers seek trade references i.e. testimonials from other suppliers about the buyer’s payment behaviour. The risk with relying on trade references is that you’ll get a snapshot of healthy relationships. But what about the bigger picture?
The business credit score takes out the personal bias and presents you with data-driven analysis.
Different credit reporting bureaus present the business credit score in different ways. At ezyCollect, we offer the data from top credit reporting bureau, illion. illion’s credit scoring model provides two credit scores: a late payment risk score and a failure risk score. Two scores for the price of one!
illion’s late payment risk score predicts the likelihood of a company paying severely late (90+ days beyond terms in the next 12 months. The score range is 101- 799, where 101 represents the highest risk and 799 represents the lowest risk of delinquent payment.
Illion’s failure risk score predicts the likelihood that a business will seek legal relief from its creditors or cease operations leaving unpaid debts in the next 12 months. The score range is 1001-1999, where 1001 represents the highest risk and 1999 represents the lowest risk of delinquent payment.
The data used in the statistical analysis are mined from the credit bureau’s commercial database. Every bureau has its own credit score algorithm to calculate a credit score.
Key influencing factors in the illion business credit scores predicting late payment risk and business failure risk include:
Business failure risk scores are also influenced by company financial information, such as financial records lodged with the corporate regulator.
Each credit reporting bureau provides the business credit score differently and offers a range from minimal risk to severe risk. Generally, the higher the credit score, the healthier the credit rating.
As a general rule of thumb, suppliers give credit to companies that have a moderate to minimal credit risk score. They then continue to review and monitor the terms. As a customer’s credit score improves (average to minimal risk), suppliers may extend terms to nurture a healthy buyer relationship.
Paying creditors on time is the best thing that buyers can do to build a good business credit score.
Your business credit report is compiled by a credit reporting bureau from your business’ past and present credit activity. It considers your loans and other borrowings, as well as your repayment history on bills such as water and electricity. The corporate regulator—in Australia, it’s the Australian Securities and Investments Commission (ASIC)—also provides information on business compliance and company financial information. The courts provide information on any court actions and judgements.
The business credit report can be basic or comprehensive. Order a basic credit report for details on the business and its office holders, legal events that occurred in the past 60 months and court actions related to directors.
Order a comprehensive business credit report when you want to know more: historical ASIC data, Personal Property Securities Register (PPSR) and industry average risk scores.
Past payment performance is a key influence on the business credit score, so it’s important that a business pays its bills on time. Late payments on credit cards, utilities and supplier bills can negatively impact the business credit report and score.
Lenders don’t want to see that a business has maxed out the credit available to it. It’s better to have more credit available than used. That means a business should pay off its credit card balances on time, or increase its credit limit so the use ratio is lower, or decrease its credit card spending.
A business credit score can improve when there are positive trade reference attached to its credit file. Positive payment experiences are evidence of a business’ creditworthiness.
A business can check its credit report with any of the major credit reporting bureaus. Some services will offer one free check each year, otherwise there is usually a fee. A business can erase errors on the credit report by providing the bureau with up-to-date and accurate information.
Suppliers use business credit reports and scores to assess if a new customer is likely to pay their invoices on time. They may trade with high risk customers by accepting only cash on delivery, while offering low-risk customers extended credit limits and longer payment times.
The Australian economy is currently experiencing its biggest economic contraction since the
1930s. Australia’s triple A credit rating is intact but on a negative slope, according to credit rating agency, S&P Global. In June, the Reserve Bank of Australia (RBA) confirmed there is considerable uncertainty about when the economy will recover.
What is certain is that the financial contagion of the Coronavirus pandemic has hit every industry. The Organisation for Economic Co-operation and Development (OECD) report that some industries like arts and tourism are in full shutdown. Meanwhile, others such as construction and professional services have declined by half.
Economic inactivity puts a huge question mark around a business’ ability to repay its debts. That means that previously creditworthy businesses may now be bad debt risks; prompt payers may quietly start to withhold payments.
Does your company know which customers have a deteriorating credit rating?
A credit rating or a credit score is an indicator of a business entity’s likelihood to meet its financial obligations. A credit reporting bureau like illion analyses dozens of credit rating variables including an entity’s credit history, publicly available financial and organisational information and even court actions to determine its creditworthiness and financial stability.
To arrive at an overall credit appraisal for an entity, illion for example, will assess the likelihood that the entity will experience severe financial distress or failure in the coming 12 months, as well as its risk of paying severely late.
Credit monitoring is a risk mitigation service provided by credit reporting bureaus. A credit
reporting bureau will collate, analyse and report on a business entity’s noteable
commercial credit activity as it trades in the marketplace. Changes in a company’s credit score can be picked up quickly by a credit monitoring service.
Many companies that offer trade credit to their customers rely on a daily credit monitoring
service. That’s because companies want to know when their customers are showing the first
signs of financial distress. Think of it as an early warning system to avoid potential bad
Above all, a company’s credit risk exposure increases as its debtors’ financial health declines.
In a stable economy, employment and growth are steady and it’s business as usual.
Businesses can be more certain about which customers need close monitoring. Depending
on its sector, a business may confidently predict the customer segment that is likely to
register the most payment defaults, bad debts, and insolvencies. That becomes the customer
segment in which they focus their credit monitoring service.
In Australia for example, illion publishes a quarterly Late Payments Analysis and Business
Expectations Survey. The slowest paying industries have been consistent for some time:
retail, mining and manufacturing often top the list. Seasonal fluctuations also generate
predictable payment trends—we see retailers paying their invoices faster after the busy
During an economic downturn, consumers and companies hang on to their cash and the entire supply chain suffers. In unprecedented times as we have seen with the COVID-19 pandemic, some businesses will quickly grind to a halt.
Therefore, during a recession, the usual payment patterns do not apply. Many more businesses become susceptible to cashflow constraints as financial pressures ripple all the way down the supply chain. Previously good payers may not pay on time. A company’s credit rating score could change more frequently than usual as trade credit activity fluctuates.
Most disturbing in a health pandemic is how quickly cashflow cliff dives and businesses can fail.
Companies in financial trouble aren’t quietly slipping away. They are registering negative
credit activity in the market. However, without credit monitoring, it’s almost impossible for a
supplier to know its customers’ bigger trade picture.
Credit reporting agencies like illion can collect and feed back credit rating data about your customers. For example, illion’s credit monitoring service can alert your business when your customer registers a change in significant credit activity:
Alerts are generally described as positive, neutral or negative events in relation to a
company’s credit rating. ezyCollect’s credit monitoring service brings these alerts straight to your dashboard.
A collection notification is typically classed as a negative event. It indicates that the
original creditor has given up trying to recover a debt and has referred it to a debt collection
For example, illion will issue a negative event alert about a business entity when it has
received instruction to collect an unpaid debt from it.
Court actions are negative events. The various courts across Australia are responsible for
providing credit reporting bureaus with data on writs or summons that have been issued to a
commercial entity in relation to an outstanding debt.
Director changes is a neutral event as it is a notification that a company officeholder has
changed. Still, it’s important for a supplier to know when their customers’ directors change.
This could be because a director may have signed a director’s guarantee that they will be
personally liable for their company’s unpaid debts. If this is the case, then the supplier would
want to know if that director moves on.
In Australia, for example, a business must keep its company officeholders’ details up to date
with the federal corporate regulator, Australian Securities and Investment Commission
(ASIC). Director changes are significant because officeholders have obligations to comply
with reporting and legal requirements.
Financial change is generally a neutral event as it indicates that a monitored company has
lodged its financials at ASIC for review.
A public filing notification is a negative event. It informs that a creditor of a business
entity has made an application to the court under the Corporations Act to wind up that entity
due to insolvency.
Status change alerts could be positive or negative as they relate to the current ASIC status
of the entity. An example of a negative alert is when ASIC confirms that an entity has moved
from ‘Registered’ to ‘ Under External Administration’. An example of a positive alert is when
ASIC confirms that an entity has moved from ‘Strike-off action’ back to ‘Registered’.
Score changes report that a company’s late payment risk and /or failure risk scores have
changed. These credit scores indicate the likelihood that a business entity will pay severely late and fail in
the next 12 months. Scores can improve, stay the same, or decline, and therefore generate a
positive, neutral or negative alert respectively.
Shareholder changes are a neutral event. ASIC notifies that a company has updated their
register of shareholders as required by law. Shareholder changes are important to know
because they indicate a change in ownership of the company which may affect employees,
suppliers and customers.
During an economic recession your customers’ typical payment behaviour can deteriorate as
trade inactivity persists. A credit monitoring service can help you to quickly identify
customers that pose a heightened credit risk to your business.
Financial controllers and credit managers typically use credit rating insights to mitigate
foreseeable bad debt risks to cashflow.
Try ezyCollect’s Credit Insights for 2 months free including 3 free credit score checks each month.