The global pandemic has had a catastrophic effect on businesses large and small.  Small businesses (SMEs) are the most vulnerable to revenue disruptions.  They are likely to have minimal access to the cash reserves and to borrowing necessary as revenue drops to sustain the working capital needed to operate.  Credit terms offered by suppliers may be a primary source of liquidity until the business climate turns around.

Many companies, maybe yours, are dependent on continuing demand from SMEs. In those cases, a primary credit department objective is to enable continued sales to SMEs impacted by the economic downturn, while managing the increased risk. Here are five things to consider as you manage through this.

1. Have a written credit policy and consistently adhere to it.

• Require strict compliance to the credit line and terms. If payment is not made as agreed, impose a credit hold to stop additional risk.
• Review the SMEs continued creditworthiness before you allow credit exposure beyond the approved credit limit.
• Consider extending additional credit if the business demands increase, only after a period of 90 to 180 days of prompt payment experience.
• Require an acceptable guarantee or collateral if the customer requires credit exceeding the approved credit line on an open account.

2. Ensure your company has the proper controls in place:

• Put a high priority on managing the Customer Master Record, and maintaining strict control over new customer numbers. Avoid duplicate customer numbers for the same business to prevent credit exposure from getting get out of control.
• List your terms on every invoice
• Comply with regulatory requirements when dealing with small companies, partnerships, and sole proprietors, such as the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act.

3. Ask these questions to determine the “risk-reward” for extending credit to an SME.

• What is the value of the average sale?  Does a high volume of low-dollar sales justify the administrative costs and risks?
• Is your company's profit margin and administrative capacity for sales to an SME adequate to cover the expense and resources related to new customer onboarding, invoicing, and collection, and managing returns and invoice disputes?
• What is your company's risk tolerance? Do these customers drive profit but makeup only a small segment of your portfolio? Or is the risk that slow payments or bad debt write-offs will seriously impact your company's cash flow and financial stability?
• What controls are in place to assure that collection of a small line of credit will be adequately monitored?

4. Understand your company's long-term strategy:

• How do sales to SMEs fit into your company's marketing and sales strategy?
• What are the competitive advantages and risks of you adhering to standard industry credit policies and credit terms used by other suppliers?
• What is the potential for increased profitable sales in the future?

5. Offer alternative forms of payment or modified payment terms:

• Credit Card Payment: To what degree will Credit Card sales impact profit? There are processing fees, the potential of contested charges delaying payment, and the administrative time required to address disputes and reconcile billing statements.
• Cash in Advance via electronic or check payment.
• Partial Payment in Advance reduces exposure.
• Take orders but stop shipments until the previous purchase has been paid.
• If repetitive sales are expected on an open account, consider extending only enough credit to cover terms plus 15 days.
• Consider limiting the credit line to only what the customer needs, based on their orders and terms.

So, as you can see, by evaluating how you do business with SMEs, and implementing appropriate controls and approaches, your company can continue doing profitable business while managing the risks.

Here's a 15-minute video on 5 strategies to alleviate risk while dealing with small customers.