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JIMMY MOYAHA: Another relationship one has to manage if you’ve got a business, you’ve got creditors, you’ve got suppliers, you’ve got vendors that you need to deal with. In some cases you are the creditor. That’s what we’re looking at. When you’re the creditor and you have clients or you have customers that owe you money, how do you navigate that and how do you ensure that you get paid in the event that someone does declare insolvency? What are the warning signs and what do you need to look out for?
I’m joined on the line by Frank Knight of Debtsource to take a look at that. Frank, thanks so much for the early morning. What are the warning signs you need to be looking out for if you are concerned that some of your debtors might default on their debt?
FRANK KNIGHT: Good morning, Jimmy, and thank you. I think the first thing that our listeners need to know is that the insolvency rates globally are busy increasing so it’s becoming more and more of a focus, and customers need to be far more vigilant in terms of how they manage their debtors. So some of our local statistics here – and our sample sizes are based on thousands of debtors – show that the local delinquency rate is increasing by up to 27% and internationally it’s also happening.
Some of the world’s biggest trade credit insurers are saying insolvency rates are going up by 21%.
The Association of British Insurers were saying that the first quarter this year was 81% up in terms of their credit insurance claims versus last year. So the first thing I think that the listeners need to know is there’s definitely a lot more risk out there in the market.
I think the second thing then is what companies can then do to make sure that their debtors are okay? I think the first thing that they need to do is make sure that they have additional facilities from a cashflow perspective – apply for additional facilities, ask suppliers for extended terms and maybe get some additional lines in place. So if you know there’s pressure on your cashflow that’s kind of coming down the line, then those are smart moves in order to be able to compensate for those potential issues.
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I think the other thing that companies can also do [is realise] now’s a great time to consider trade credit insurance. For a small percentage of the turnover to those debtors you can actually buy insurance in case the debtor doesn’t pay you; then at least you’ve got a claim against the insurer.
Generally though, be far more vigilant from a debtor perspective. Make sure that you kind of check every debtor as often as possible, at least annually. And in between those times also monitor debtors very, very carefully to make sure that the moment there’s a problem that your systems and your structures are well set up to react to that problem quite quickly.
JIMMY MOYAHA: How do we manage the business side of it? How do we manage the collections and the risk and the insurance side of it? Beyond just taking out trade credit insurance, are there other things that businesses can do in terms of a screening process, in terms of enhancing some of their collection cycles, or all of that to not have to wait to get to that point?
FRANK KNIGHT: Yes, Jimmy, absolutely. Even before companies consider buying trade credit insurance the first thing that they should do is they should credit check all of their new debtors coming on board in terms of Fica [Financial Intelligence Centre Act] – it’s a requirement to do some customer due diligence on debtors anyway. And it’s very, very important to make sure that the credit records of those companies that you’re taking on are proper and that those companies are of the quality grade that you want to bring onto your debtors’ book. It’s a critical process. Again, do that annually and then also monitor those debtors in between.
Then the other thing you can do is to better organise your credit control side.
So the moment the goods have been sent, get the invoice out there to customers; be really organised from a paperwork perspective. Get purchase orders out to customers as quickly as possible, deal with queries as quickly as possible. Get your credit and your sales guys to talk to each other so that there isn’t some sort of a mismatch in the process.
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And then if you get yourself properly organised from a credit-control perspective you’ll identify problems with your customers that much earlier. That will make a massive difference in terms of being able to respond to it.
So in other words, if a customer is not paying you 15 days past due date, you’ll pick it up that much quicker; you’ll know exactly what’s going on, and then you can be in touch with a customer and take whatever measures you need to.
JIMMY MOYAHA: I suppose that’s how banks deal with it as well. Just get ahead of it and stay ahead of it.
Thanks so much, Frank. That was Frank Knight of Debtsource, giving us a sense of how to spot the early warning signs that you might have customers that could potentially go insolvent.
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