Are You Suffering From Credit Insanity?

Einstein once said that the definition of insanity is doing the same thing over and over again and expecting different results. With the current credit meltdown and challenging economy, we're seeing companies sticking to the old "bill it and they will pay" along with the "check the references and if everyone else gives 'em credit, let's join the group!" These are fatally-flawed processes that companies haven't bothered to update. It was easy to have success in the past when most companies paid their bills; it's not so easy now.

WHY THE DIFFERENCE NOW?
The challenges in the economy aren't just the experiences of construction companies and retailers any more. The giant slowdown in the economy has trickled to most parts of the economy including manufacturers and distributors that may have been further removed from consumer cycles in the past. We can't keep thinking that managing our receivables the same way as we did last year or 5 years ago will get us through this storm.

WHAT CAN BE DONE TO CHANGE THE OUTCOME?
Some experts are already predicting massive credit defaults in the commercial markets just as the mortgage companies have experienced in the consumer markets. Much of the credit meltdown had to do with the fact that due diligence on the debtors was negligible. Who cares that a buyer making $50,000 was purchasing a $700,000 home they couldn't afford? Lenders and brokers were gathering their fees and selling off the mortgage so they didn't care about the risk; buyers of the debt were ill-informed about the risk they were purchasing.

In the world of trade credit, there's no excuse for ignoring what the customers can afford to buy from you--and only concentrating on what you want to sell them. Time and time again, companies are dumbfounded to find out they were major creditors to a company that was insolvent. Why did this happen? Because creditors ignored the signs that their customers were buying products and services without the ability to afford them. The only way to understand this is to change the strategy to ensure the outcome you want. Due diligence is critical to the process.

FALSE SENSE OF SECURITY
We're told by some creditors that they're "comfortable" with risk because they've insured their receivables. That's nice, but that's like watching the carpet in your office burn out of control and not worrying about putting it out because the building is insured. What about the deductible? What about the time it'll take to recreate all that was lost? What about when your insurance company stops insuring your building because they have too much risk with fires?

How do you do the deals that Sales wants and your credit insurance company won't cover? This is now happening in the credit insurance business right now. Insurance companies are taking hits and have stopped covering your customers that either won't provide financials or that have maxed out coverage with other vendors. Now what?

DUE DILIGENCE IS KEY
Companies need to stop relying on old, outdated practices like reference checking (thanks Uncle John for giving that vendor a great reference for me!) and "gut instincts" to give credit approvals. Real, solid due diligence is critical right now to understanding credit risk. Gather any and all information you can find on your customers, including the ownership risk. Use that information to make an intelligent, well-thought out decision that weights those pieces of information that will be the most predictive for future ability to pay vendors.

You can start now to create your own due diligence process to ensure minimum write-offs to your receivables. If you want an expert group to perform this task for you, let us know. Give us a call at 800-451-0164 to see how expert decisioning can help you stop the credit insanity.