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Getting a Better Handle on Your Corporate Clients' Ability to Pay

Companies can mitigate the risk of clients that are unable to pay their bills.

In the midst of a stalled economy are a few bright spots. In some respects, companies' creditworthiness has risen over the past few months, and their suppliers are having less trouble collecting what they're owed. 

The February Credit Managers' Index released by the National Association of Credit Managers revealed its favorable-factor index recently jumped slightly to 59, a small gain over January's 58.7. However, trade creditors have reported overall sales and new credit applications are down slightly, which suggests business-to-business companies should still be careful when offering lines of credit to new partners or expanding the amount of credit a current partner can access. 

How to Reduce Risk and Ensure Customers' Ability to Pay 
As debt crises escalate across the globe, more countries are having problems paying their bills. The United States is faced with a huge deficit, as are many countries in the European Union - one of which was recently bailed out at the expense of its wealthiest bank account holders. These debt issues could begin to impact companies across the world, especially if large firms that rely on government contracts are no longer able to receive coveted business due to federal budget cuts. This is just one area to keep watch on as companies look over their client list to see which ones have the highest credit risk. There are many other ways they can mitigate the risk of their business partners not being able to pay their bills. 

Require a comprehensive application. Even though asking for financial data can be awkward when trying to win a new client, businesses that don't do it could be putting themselves at risk for financial problems in the future. These applications should consist of references, any bankruptcy information, credit history and additional relevant company or industry analysis. Depending on what an application reveals about a client or potential customer, a firm can deny credit and spare itself the risks associated with unreliable partners. 

Complete a business investigation. Even though a firm's application may appear reliable, that doesn't necessarily mean it ought to be approved. Entrepreneur magazine suggests companies vet applicants by checking information that is available publicly, such as news articles and stock information, and even check company social media profiles. This information may give a firm a better feel for if its potential client is reliable and will prove to be a strong partner in the future, or whether the applicant is struggling and may be unable to pay in the coming months.

Follow up on concerns. Just accepting the application isn't enough; your credit department will also need to make sure it's filled out and meets your company's predetermined threshold for creditworthiness. At the same time, it's important not to write off a firm that may not look great on paper. If a business that applies for credit has a history of not making payments or declaring bankruptcy, it's important to find out why, rather than instantly denying the company. Perhaps it recently came under new management and has performed well in recent months or its finance department has been reworked, allowing more experienced professionals to handle expenses and responsibilities. 

Monitor account information and stay updated. A low-risk company approved for credit can easily and quickly turn into a high-risk client. To stay on top of problematic accounts, creditors should monitor their clients for changing payment patterns, such as previously 30-day payers who start taking two months to pay their bills. But even punctual clients can be having financial trouble and suddenly go out of business, so also be on the lookout for clients that suddenly pull back their orders or start asking for cheaper services. If you can get access, any information about their cash flow and ability to collect from their own clients can give you valuable insight into whether they will be able to continue paying their suppliers or need to be put on a different payment schedule.