Paradoxes of Receivables: How Debt Can Become a Business Advantage

Geopolitical uncertainties in the world, rising interest rates, and economic slowdown are three horsemen of the apocalypse threatening the security of business operations. Any failure to collect on delivered products and services can lead to immeasurable business consequences.

Therefore, every company must incorporate the protection of its receivables into its operations. Solutions and tools exist, and to ensure against risks and monitor the operations of other companies, it is best to involve experts in the field.

Credit Check

Quality receivables management should, as a first step, include credit checks of customers as well as suppliers, notes Predrag Novačić, director of Business Intelligence, whose portal Bon.hr offers options for credit checks and monitoring of legal entities. According to him, this helps in making correct business decisions that are crucial for reducing the amount of bad receivables, which ultimately contributes to ensuring the liquidity of the company.

He also states that continuous monitoring of creditworthiness and customer behavior allows for timely responses in possible additional collection procedures. It is crucial to monitor due payments, establish clear payment terms, and respond quickly to delays in collection.

– Receivables insurance is a special service that protects the company from the risk of customer non-payment. Companies with receivables collection problems often have issues paying their own suppliers. An example would be a company whose customers pay within, say, 90 days, while the payment terms to suppliers are 30 days. If the company cannot finance that difference from its own operations, it must incur debt to bridge the 60-day gap. If they still encounter problems with receivables collection despite this, we advise engaging specialized debt collection agencies. Such agencies possess the knowledge and tools to collect from creditors more effectively, whereas this is often done by individuals who sold the goods or services, which is not particularly efficient – believes Novačić.

He reminds that the recent obligation of fiscalization 2.0 brings new tools that will help companies manage their receivables more effectively. Such tools, he said, include the option for automatic credit checks before and automatic monitoring after sending invoices.

Warning Signs

Companies must have access to up-to-date and reliable information about the creditworthiness of their partners, their payment habits, sector trends, and macroeconomic indicators, emphasized Lucija Marinčić, director of Coface Croatia for insurance representation. Coface thus offers comprehensive solutions for an early warning system, and receivables insurance is the most direct way to protect the company from losses caused by non-payment. Before the occurrence of non-payment, there are signs that can be recognized in the behavior of business partners and their environment.

– Our risk management platform Urba360 provides a comprehensive overview of the portfolio of business partners in one place. Predictive, prescriptive, and descriptive insights about companies worldwide enable businesses to make strategic decisions to reduce risk and encourage future growth. Companies most often face payment delays, sudden insolvencies of business partners, and a lack of reliable information about new customers, especially when entering new markets or collaborating with less-known entities.

Such situations can seriously jeopardize liquidity, especially if they involve larger amounts or longer payment terms. Preventively, we offer tools for monitoring the creditworthiness and payment habits of business partners, including a warning system for changes in financial stability. The Urba360 platform allows users to monitor risks associated with over 200 million companies worldwide in real-time. When problems with collection arise, we provide international receivables collection services, which are conducted in accordance with local legislation – emphasized Marinčić.

In cases where receivables are insured, she continued, clients are compensated for damages, thereby protecting their liquidity and allowing business continuity without major disruptions. Companies often reach out with questions about how to assess risk with new customers, how to set internal procedures for managing receivables, or how to respond to changes in the payment habits of existing partners. Along with advice, they also assist in establishing effective credit risk management systems.

– The most important thing is not to wait. The very first day of delay should be a signal to activate the collection process. Secondly, I recommend that communication with the customer be clear and professional, with reminders and defined deadlines. If the situation is not resolved quickly, it is useful to involve external experts who have experience in collection and know the legal mechanisms. In some cases, receivables insurance can be useful not only as protection but also as a tool for professional collection. The best time to protect receivables is before the problem arises – advises Marinčić.

Receivables Insurance

According to Gabrijela Kupanovac, head of the Sales and Marketing Department at Croatian Credit Insurance (HKO), every sale of goods or services with deferred payment represents a risk for the entrepreneur, and the longer the payment terms, the greater the risk. She recommends that companies leave the assessment of customer risk to professionals and ensure receivables so they do not encounter financial problems themselves.

– A receivables insurance policy provides protection for the business and is a tool for sales growth. Both domestic and foreign receivables can be insured, covering the risks of prolonged non-payment by the customer and non-payment due to insolvency or bankruptcy. If a customer fails to pay, the insured can typically recover up to 90% of the unpaid receivable through HKO. Through its subsidiary Business Info Service, we offer risk assessment and the preparation of credit reports on business entities. When assessing the risk of customers with whom the company establishes cooperation, we recommend reviewing their business reports.

It would also be good to check the customer’s creditworthiness with a company that prepares credit reports. It is essential to consider all publicly available data about the customer, the management and ownership structure, and to examine payment terms and behaviors towards other business entities. We recommend considering trends in the customer’s industry and taking into account global macroeconomic indicators – listed Kupanovac.

Two Types of Companies

For customers with whom companies already do business, in addition to the previously mentioned, she states that it is necessary to monitor the regularity of receivables collection, so delays in payment or frequent extensions of payment terms can be the first sign that the customer has liquidity problems and that the risk of non-payment is elevated. Kupanovac classifies companies that approach HKO for the first time into two categories.

In the first are companies that have decided to manage receivables collection more effectively and protect their business because they are aware that the non-payment of just one customer can jeopardize their operations. In the second group are entrepreneurs who would insure receivables from a customer who is already late with payment.

– Entrepreneurs should use customer risk assessment and receivables insurance preventively. When the risk of non-payment occurs, there is a high probability that damage will occur, and at that point, it is not possible to arrange an insurance policy, which means a loss for the entrepreneur. In addition to protecting liquidity, a receivables insurance policy increases competitiveness for entrepreneurs. By arranging deferred payment, the entrepreneur can increase turnover with customers, which positively affects the growth of their business income. The policy also allows entrepreneurs easier access to financing as it can serve as collateral for a loan – emphasized Kupanovac.

There Are No Safe Customers

She gives the example of an entrepreneur who operates with a profit margin of eight percent and who delivered goods worth 100,000 euros to a customer. Due to financial problems, the customer cannot pay for the received goods, and to recover the 100,000 euros loss, the entrepreneur would need to increase their income by as much as 1,250,000 euros. With a receivables insurance policy, she calculated, with coverage of 90 percent, they would receive compensation of 90,000 euros.

– In the world, the main risks that will, at least according to short-term forecasts, continue to be present in the market are the deterioration of the creditworthiness of business entities and geopolitical instability. According to our experiences, there are no safe customers. The recommendation is to arrange receivables insurance for all customers with whom deferred payment has been agreed. After concluding the receivables insurance policy, all customers enter our ongoing risk monitoring. If the entrepreneur does not have an insurance policy, and the customer is late with payment, we recommend suspending further deliveries to the customer.

In cases where the customer currently cannot make a payment but is willing to cooperate, it would be good to arrange a debt restructuring. However, when that is not possible, there are measures for forced collection and initiating legal or extrajudicial proceedings, or recourse procedures. These also incur additional costs for the entrepreneur, which HKO reimburses to its insured – warned Kupanovac.