If you run a B2C company, collecting payments is simple. The customer pays; you accept. In B2B, however, there are all sorts of new questions. What if a client needs a line of credit? How do you handle accounts receivable? What about payment collections on delinquent accounts? B2B credit management systems simplify the entire process for you. In any interaction between companies, the seller and the buyer both seek an effective way to do business. That sometimes means one company extending credit to another. But what are B2B credit management systems, and what can you do with them? In this post, we’ll tackle what B2B credit management systems can do to change the way you run your business.
What Are B2B Credit Management Systems?
Credit management is an umbrella term for handling loans and payments between companies. With it, you can create company plans for credit card transactions, late payments, customer defaults, and more.
For beginning companies, the idea is simple. All you need is a credit system so you can accept payments. When you’re B2B, the story changes. A B2B credit management system needs to be comprehensive. How will you handle accounts receivable? Cash flow? Payment collections? Customer applications for credit?
Outsourcing these processes to a third party can be expensive. B2B technology can streamline the process of managing credit issues between businesses. Done well, you can use the technology to handle a lot, including:
Handling collections: We saw a 72% year-over-year increase in payment defaults due to COVID. How do you ensure you get paid without feeling like a debt collector? Good credit management software can turn over collection reminders to AI, reducing the need to step in.
Establishing a policy for how you handle credit: Do you extend credit to a company that places a long-term order? Do you have a limit on that policy? Do you refuse to accept it? Put a policy in place. With it, your credit management system can systematically enforce your rules.
Gauging creditworthiness: Using business reports like Experian’s, you can gauge creditworthiness at a moment’s notice. You can even cross-reference your applications with issues like late payments or credit defaults.
What Can the Best Credit Management Systems Accomplish?
B2B credit management system providers are meant to make the process as soon as smooth as possible. But let’s get specific. What are some of the payment problems you can solve by having a good B2B credit management system in place? And what sort of problems do you prevent when you get one up and running for your business?
Protecting from fraud: Estimates suggest some 70% of organizations experienced check fraud at some point. A B2B credit management system can help you run background checks on business credit to help you assess your risks.
Managing credit lines: Whenever one company extends a credit line, it puts them at some degree of risk. As those credit lines extend, the risk increases. B2B credit management will let you set limits on credit lines from the top-down. This helps establish boundaries between businesses, true. Even more importantly, it creates hard ceilings for managing risk.
Analyzing cash flow: Do you feel like certain clients rarely pay you on time? Do some customers send a payment for invoices later than others? Analyzing your cash flow will help you identify your credit management blind spots.
How to Handle a B2B Credit Management System the Right Way
Any time you take on a new B2B client and extend credit, there are risks involved. A good B2B credit management system will help mitigate those risks. But it will do more than that.
Underwriting during a crisis requires new data sets
In an economic crisis, safeguarding working capital against the risks of extending credit requires a closer look at buyer data—traditional underwriting methods are no longer sufficient.
Underwriting a new customer traditionally hinges on historic buyer data, but that doesn’t provide the full picture of a buyer’s financials—especially in an economic climate defined by fast, unprecedented change and future uncertainty. Instead, pivot to leveraging data that evaluates how the current crisis has affected a buyer’s industry and how long it will continue to impact it. This includes leaning on current and predictive industry-specific data sets that answer the following questions: What is the financial landscape for that sector right now? What do the models predict for the future?
While historic data still offers valuable insight into how the business operates, forward-looking data completes a buyer’s financial picture. Use this data analysis approach to make informed decisions about the financial health of a buyer in the months ahead.
Managing customer credit lines with right-sizing in mind
In an uncertain economy, right-sizing your customer credit lines is a smart way to safeguard working capital. Analyze past purchasing behavior to accurately determine how much credit customers require to support their purchasing needs, and then adjust the line accordingly. For example, if a customer qualifies for a $200,000 credit line but purchases less than $100,000 worth of products or services each month, reduce the credit line to $130,000.
Use right-sizing to reduce the risk of bad debt without impeding customers from purchasing what they need to run their businesses. Right-sizing also gives your accounts receivable team a helping hand by reducing the days sales outstanding (DSO) and making it easier to manage overdue invoices. With more accurate credit lines, customers are more likely to prioritize payments in order to keep the credit line open.
More strategic underwriting and credit management protects working capital, and also builds and strengthens buyer relationships. During uncertain times, it’s critical to serve as a strong, reliable commerce partner for buyers. By adhering to best practices, you can create loyal customers that know they can depend on your company to keep their own businesses moving forward.