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Payment-based business lending needs adjustment during shutdowns

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Even before the coronavirus crisis upended business as we know it, the process for extending online credit to B2B buyers carried a degree of risk.

Sellers are now in a difficult position. While extending credit is crucial to supporting customer needs, finances are strained and they may not have the working capital necessary for extending credit, especially if they were unable to qualify for assistance under the Paycheck Protection Program (PPP).

To continue extending credit to buyers during a period of economic uncertainty, while protecting their business’s financial health and maximizing working capital, B2B sellers must apply a more strategic approach to underwriting and credit line management.

Customer underwriting is not immune to the challenges brought about by the COVID-19 pandemic. So, it’s critical to leverage new best practices that safeguard working capital when vetting new customers.

For example, underwriting has traditionally relied on historical, buyer-specific data. However, historical data doesn’t paint a sufficient picture in a business climate characterized by rapid, unexpected change and lingering uncertainty. In this climate, current and predictive data sets that look beyond the individual business are more important than ever.

Current and forward-looking data from a buyer’s industry and customer base can provide answers to several important questions: What is the current financial landscape for that sector? What are models predicting for the future? Answers to these and other questions can help clarify the outlook for the buyer’s industry and customer base over the next few months.

With the economy still in a state of flux, there is a growing need to right-size the credit lines of current customers. Take time now to accurately determine how much credit customers require to support their purchasing needs and then adjust credit lines accordingly.

For example, if a customer qualifies for a $250,000 credit line, but typically only purchases $150,000 of products or services each month, consider offering a $180,000 credit line. Reducing a large credit line to reflect actual purchasing activity reduces your risk of bad debt without inhibiting customers.

Additionally, when credit lines accurately reflect customer spend, customers are more likely to prioritize payments to keep that line open for essential purchases as they approach or even meet the credit line. As a result, days sales outstanding (DSO) may decrease and your accounts receivable team can better manage credit and stay ahead of overdue invoices.

If extending credit is still too burdensome for your business right now, find a partner that takes on the credit extensions — and risk — for you. Taking whatever steps necessary to protect business financials while still supporting customer needs positions you as a key player in helping customers keep their own businesses running. And during a time when businesses are struggling across industries, the ability to serve as a stable commerce partner goes a long way.

This article, written by Brandon Spear, was originally posted on PaymentsSource.

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