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Credit strategies for protecting working capital in a crisis

cash being exchanged with bill graphic

For B2B sellers, extending credit to customers always carries a degree of risk — payments could be delayed, or worse yet delinquent, jeopardizing working capital. But in an economic crisis, that risk is compounded.

When finances are strained, sellers are caught between the need to support customer purchasing and safeguarding their own working capital. And during a crisis, sellers may lack the working capital needed to extend credit, especially if they’ve exhausted other sources of financial assistance or failed to qualify for the Paycheck Protection Program.

However, with the right approach, B2B sellers can still extend credit in the midst of economic uncertainty — with minimized risk. Supporting buyers’ purchasing needs while protecting the financial health of the business requires strategic underwriting and managing of customer credit lines, which as trusted advisors, accountants can provide assistance with.

Long-term strategies for safeguarding working capital while extending credit

Traditional methods are no longer enough to insulate working capital from the risks associated with the extension of credit to customers. As a B2B seller, consider new best practices that will reduce threats to working capital over the long term.

  • Underwrite using current and predictive data. The current economic climate has rendered historic buyer data insufficient for underwriting in a way that fully protects sellers. Now, it is critical to ask how the pandemic has affected the customer and their industry, and how long they will be affected. The answer requires a holistic view of the business’s financials that looks beyond the individual buyer, and instead uses current and predictive data sets from the buyer’s industry. This data paints a more complete picture of the buyer’s current and future financial landscape, which can help determine the financial health of the buyer and their customer base in the months ahead.
  • Right size customer credit lines. This is the time to ensure that customer credit lines accurately reflect purchasing behavior. If they don’t, adjust accordingly. For example, if a customer qualifies for a $300,000 credit line and purchases less than $200,000 each month, offer a $230,000 credit line instead. Adjusting the credit line closer to actual purchasing amounts reduces the risk of bad debt, but doesn’t restrict customers from purchasing what they need. Right sizing can also decrease days sales outstanding (DSO). Customers will prioritize payments to keep the credit line open, which helps accounts receivable teams stay on top of overdue invoices.

Quick wins for protecting working capital in a crisis

Extending credit may still be too risky for some B2B sellers. However, standing firm as a reliable commerce partner during unstable times is essential. In addition to the best practices noted above, here are some quick-win solutions for protecting working capital and better managing credit in a crisis:

  • Speed up collections. Accounts receivable teams might wait to collect until the payment is past due, but this could spell trouble down the road when finances are tight. Back up the collections timeline and begin the process as the payment date approaches.
  • Outsourced funding solutions. If extending credit just isn’t in the books, there are still options. Find a trusted partner that takes on credit management and extensions, which means you can outsource the risk.
  • Paycheck Protection Program (PPP). For those that qualify, PPP funding is a great financial resource. The loan supplies cash for rent and payroll, freeing up working capital to deploy in other areas of the business, like floating alternative funding solutions. The SBA is currently accepting applications, but the status of the program is subject to change as COVID-19 continues. Consult the official website for the latest information.

Effective underwriting and credit management protects your business, and helps you develop and retain loyal buyers. These practices foster a customer base that knows they can depend on your products or services to keep their businesses running — during uncertain times and when life returns to normal.

This article, written by Brandon Spear, was originally posted by Accounting Today.

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