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Adapting to Change in Credit

The rise of COVID-19 has brought with it many firsts for individuals and companies. The Darwinian notion of “survival of the fittest” has been an important aspect of life over the past century and a half; however, applying this idea from English philosopher Herbert Spencer can be problematic. Perhaps changing the word “fittest” to “most prepared” or “most willing to adapt” better serves the business community. It’s difficult to imagine and be prepared for a black swan event such as COVID-19, but businesses that are able to prepare and adapt through have a better chance at survival.

During a recent FCIB webinar, “Best Practices—The Effects of COVID-19 on Credit Management Processes,” a panel of speakers reviewed the credit industry and some aspects of it that must be studied in order for businesses to survive during this uncertain time.

Among the top business priorities to consider are minimizing exposure, working remotely, technology and communication—both within the business and with customers. Volatility, uncertainty, complexity and ambiguity (VUCA) have turned the business world upside down in some cases. Dealing with this and being able to respond appropriately is difficult. One of the biggest impacts on the credit industry was what the webinar called the “working remotely experiment,” which is a fair statement as many businesses have never explored this avenue of employment.

In India, not many companies allow work from home as an option due to a number of reasons, including bandwidth problems and the lack of interactions. “Credit and collections have to be on their toes to make sure you get paid and keep customers happy,” one panelist said. One important aspect he brought up is that even though you are working from home, you are being productive—collecting cash, ensuring the team is on its toes collecting information, etc. Work hours have increased but credit professionals are able to be at home instead of dealing with long commutes to and from work. The moral and productivity of the team are also important.

One panelist told his team to take some personal time—go for walks and make lunches. His team even voted on the best lunch after they sent pictures in to compare. Finding a positive work-life balance can be challenging, especially with children around. But he was surprised how fast they were able to adopt to the new normal of working remotely. To keep moral high, they also focused on goals like ownership, accountability and trust with teammates.

In order to stay on top of business while working from home, changes had to be made. Technology played a big factor in allowing the work from home “experiment” to take place. A 24/7 call-in line was created to assist employees with software application issues, problems with their VPN, etc. This allowed employees to seamlessly perform work from anywhere. The No. 1 priority was to make sure everyone can do their job.

Communication has changed during the first half of 2020, turning more traditional meeting spaces into virtual ones. Technology like Zoom and Microsoft Teams is helping to make sure everyone is able to do their job and communicate with each other and with customers. Credit risk and collections have also needed to adapt during this time.

One panelist’s process is designed in a way to have each credit risk step complement each other rather than hinder. The overall role of the credit department is to mitigate risk of loss and ensure cash collection on time to improve the company’s cash flow. To do this, customer accounts that default on payment are flagged, while “good customers” are given a longer leash. Interactions with customers have

doubled as customer reach out more often. They are looking for credit line increases or more product to stock up on. So, it’s a good idea to look at policies and procedures during VUCA times. Doing a deep dive into portfolios, understanding the different risks for the different industries and identifying customers

based on risk is a good place to start.

Credit departments can manage credit risk by putting accounts in buckets such as significantly, moderately and minimally disrupted. Accounts in the significantly disrupted bucket were not really able to make money via operations and are in the high-risk category—they aren’t paying on time and can be put on certain credit holds. Moderately disrupted customers are more likely to be given some collaboration to make sure they don’t slip into the significantly disrupted category. These companies

might see incentives such as discounts for paying on time or be sold products with a letter of credit or another security interest. Minimally disrupted customers are bigger service providers, but they are still looked at to make sure the business is not impacted negatively. The important thing is to continue collaborating with the sales team and those on the ground to make sure to get the most up-to-date

information on customers.

-Michael Miller, managing editor

What are credit professionals but risk takers? Every day, credit departments all around the world are making different decisions, all of which will alter their company’s business. Like a marriage vow, credit professionals know they are going into their final decision for better or worse, and no matter the outcome, they will accept the challenges that lie ahead.

Credit decisions don’t always end with doom and gloom; however, a solid risk management plan will certainly come in handy during troubling times. The Five Cs of Credit—Character, Capacity, Capital, Collateral and Conditions—are a great start, but companies specializing in business credit and risk management, such as Fiserv, will tell you there is so much more to learn. Take for example Fiserv’s Financial Risk Management solutions that not only focus on credit risk but also market and interest-rate risks.

“A better understanding of your risk position will equip you to plan more effective, and ultimately more successful, performance management strategies that benefit your entire organization,” Fiserv’s website states. Among the numerous benefits from their solution is an “integrated ALM, market risk, credit risk, liquidity risk, Basel II/III and IAS 39 to help correlate and model risk factors through the economic cycle.”

“Every balance sheet is exposed to risk,” Fiserv states. “Since financial services professionals do not have psychic powers, you must evaluate multiple balance sheet structures under alternative interest rate scenarios. Why? Financial institutions need to understand how much risk exposure is embedded in their balance sheet.”

In an interview with PYMNTS, Gianluca Pizzituti, CEO and co-founder of invoice financing platform Velotrade, said that when working with a customer, there is generally:

•“Credit risk, or risk that a business will fail to repay financing

• Performance risk, which takes into account the threat of a vendor failing to deliver goods as reflected on a purchase order; and

• Transaction risk, which addresses the threat of false documentation of shipping fraud.”

Prior to the pandemic at construction company Systems, LLC, credit manager Kendra Gerdes said, they actively offered their understanding and experience to all areas—especially to sales and upper management—about how they could help mitigate risk in any way possible. There are skills in the credit area that are transferable to other areas in terms of risk assessment and mitigation, she noted, and these are times of opportunity for credit professionals to become more actively involved in other areas of the company and provide bottom-line value.

“When the economy is in a state of flux, credit is asked to stretch,” Gerdes said. “How can we maximize sales, mitigate risk and maintain the goodwill of the customer, while keeping an eye on the bottom line? These items come in conflict with each other as risk tolerance becomes harder to expand in lieu of more challenging sales demands and more risk puts pressure on the bottom line, with potential slow-pay or even no-pay situations.”

The credit manager said they do their best, use their best judgement, offer their opinion on situations, and then do everything within their ability to ensure whatever decision that is made is the correct one. Systems, LLC, has found that these are the times when success isn’t defined only by KPI’s, but also by the intangibles that credit brings to a company with improving relationships, creatively working with customers to secure a sale and, most importantly, the payment as well as the follow-up questions to get to the substance of a challenge, she said. This includes openly communicating with smaller customers about using notices of furnishings.

Preferred Pump & Equipment, LP, a wholesale distribution company of water well equipment and supplies, has flourished during the pandemic, said accounts payable manager Lorri Howard, yet credit, performance and transaction risks are ever present and managed continuously to mitigate bad debt loss. The amount of risk to a business has more to do with business’ credit administration practices, Howard said, rather than with how a debtor/customer will perform. As a wholesaler that operates in commercial credit, Preferred Pump & Equipment, LP, has the flexibility to implement practices to keep its bad debt and past due stable whether in a pandemic or in a recession. Her advice to other departments looking to improve their risk mitigation strategies during times like these centered around creating a network with a salesman or the front-line interaction workers.

“There are a lot of risk indicators that salesmen see that accounting and credit will not see until a risky situation has festered a bit,” she said. “That early warning helps the credit department partner with the customer during hardships so that the credit extended can be more secured, but also appropriate (affordable) for the change in circumstance. Salespeople will also know of ownership changes which are so often not disclosed to creditors. That early warning allows credit to obtain necessary the documentation and any securities in place can be updated.”

—Andrew Michaels, editorial associate