Credit Management in a Recessionary Environment

Updated: May 31, 2024

Key Insights

Credit management should receive renewed focus during an economic downturn.
Warning signs include delayed and/or lump-sum payments and a lack of customer responsiveness.
There are several strategies that can greatly reduce credit risk and provide downside protection.

Why It Matters

Rising interest rates, soaring inflation, and supply chain challenges are all having a significant impact on businesses. As key indicators point towards a recession on the horizon, it is important to evaluate the potential impacts on your business either directly or indirectly. Credit terms and associated policies should receive renewed focus to ensure trading risk is appropriately mitigated.

Warning Signs

There are often very clear warning signs that a customer is experiencing financial challenges, these include:

Ageing Receivables – Receivables stretching beyond stated credit terms is a classic sign that a customer's working capital position could be strained, particularly if the customer has a history of on-time payments.

Lump Sum Payments – Irregular or lump sum customer payments should be monitored as this is a classic sign that a customer is managing its payables closely. Unless a payment arrangement has been agreed upon previously, receiving lump sum payments should be a call to action.

Slow Communication – Delayed communication including last-minute requests for payment deferrals is also a sign that payables are being managed. Inquiry with other industry participants can often provide good insights as you are likely, not alone.

Visual Indicators – Visual warning signs include, depleted inventory levels, lower staffing levels and deterioration of the physical premises or capital equipment.

Credit Management Strategies

Tighten Credit Terms & Policies

The simplest way to manage credit risk is to tighten internal policies. This may include shortening credit terms and revisiting collection policies such as follow-up timeframes, frequency of payment reminders, and earlier enforcement measures where necessary.

Advance Deposits

Consider requiring an advance deposit, particularly for specialized or custom orders that have limited resale value. This can be an effective tool to ensure that production costs are covered at a minimum.

Register Security

Depending on the size of the account and the value of goods, consideration should be given to registering security on the Personal Properties Securities Register. While there is a cost involved, properly registered security provides greater protection in formal insolvency proceedings. Legal counsel should be obtained if considering registering security.

Other Measures

If it is an isolated incident, payment arrangements can be an effective compromise and show of support for key customers. As a last resort, stopping credit and requiring cash on delivery may be necessary.

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