Business Insights CreditorWatch
4 mins read

How manufacturing businesses can prevent bad debt

Emma Berry
By Emma Berry, Business Development Manager

For the vast majority of business owners, debt collection is not something you want to spend too much time dealing with. Whether you’re in it, chasing it, or just trying to stay one step ahead of it, you probably feel that the hours grappling with outstanding payments could be better spent working on your business.

But the fact is, debt is an inevitable by-product of being in business. The minute you start extending credit and dealing with multiple stakeholders, you are exposing yourself to credit risk. It’s only a matter of time before unpaid invoices and debt collecting agencies are part of your daily routine. While this is true of all businesses, there are certain aspects of the manufacturing industry that make it especially high risk.

The longer a debt remains outstanding, the harder it is to recover. In this article, we will share advice on how you can use due diligence measures like requesting a credit check or credit score to keep your manufacturing business from being sunk by bad debt.

Reliance on Complex Supply Chains 

Running credit checks on all your business partners is the most effective way of reducing credit risk, but that’s often more complicated than it sounds. The manufacturing industry is particularly susceptible to credit risk, and recent global events have made it even more so. Part of the reason for this is that many manufacturers are heavily reliant on global supply chains, which often involve a complex network of contractors and sub-contractors, second and third-tier suppliers, and various other stakeholders. Keeping tabs on all of them is a huge undertaking.

Delving into the credit history of each of these entities takes time and money. For this reason, many manufacturing companies don’t request a credit report or credit score for their partners and customers, or they will only request them for the companies they deal with directly, assuming those companies will perform their own due diligence. Needless to say, this isn’t always a safe assumption, and what you don’t know absolutely can hurt your business.

Staff Shortages

Another problem in the manufacturing industry is that, unlike other sectors, the majority of the work cannot be performed remotely. While the COVID-19 pandemic saw some entire industries move to a remote working model, this was not possible for manufacturers. In order to create their products, staff and materials need to be on site. Staff shortages can lead to serious disruptions with far-reaching consequences.

Financial Mismanagement

Along with these challenges, manufacturers are subject to the same issues arising from financial mismanagement that can befall any business. Poor communication, weak credit policies, and inefficient debt collection procedures can lead to outstanding bills and missing payments. Many business owners will not even notice that a particular client’s payments have become increasingly unreliable until they receive notice that that client has liquidated their business.

Credit checks are indispensable when it comes to safeguarding your business against bad debt. However, there is no such thing as zero risk. Even when all necessary precautions are taken, you can still find yourself holding the check when the unexpected happens. This is why efficient debt collection needs to be a cornerstone of your financial strategy.

How to Prevent Bad Debt and Get Paid Faster 

While you can’t eliminate all credit risk, you can minimise the severity and frequency of bad debt and limit its ability to impact your business. The most effective way to do this is by first of all performing a thorough credit check for every business you deal with before extending credit to them. The second is to optimise your debt collection process, which will allow you to recover your money quickly wherever possible.

Due Diligence

CreditorWatch offers a number of highly effective tools for the purpose of due diligence. Our comprehensive credit reports provide you with a detailed financial history of all the businesses you are dealing with.

RiskScore, the most predictive credit score on the market, takes data from our 55,000+ customer base and over 11 million trade lines to calculate with accuracy the likelihood of a company defaulting on their payments in the next 12 months. A Financial Risk Assessment evaluates a company’s financial health and their chances of leading your business into financial hardship.

Monitoring and Debt Collection Tools

Our systems include interactive trade programs like DebtorLogic to keep you updated about changes to the financial health of your partners and customers. You can also set alerts so you are notified of any adverse behaviour or high-risk indicators, such as court actions or default notices from other companies. You can then prioritise collections for those businesses and change your payment terms to stay ahead of bad debt.

We use AI technology to automate the debt collection process, saving time and money associated with the administrative costs of trying to recover bad debt. Periodic reminders, overdue notices, letters of demands, and official payment default notices let your customers know you’re serious, and the CreditorWatch name carries the weight to get their attention. Our customers average a 53 per cent increase in recovering payments when they use the CreditorWatch logo on their statements.

So much of the manufacturing sector depends on events in the wider world, but credit checks and debt collection are two factors you don’t need to leave up to fate. Contact CreditorWatch today to learn more about how our tools can protect your business.

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