Credit. Avoid being collateral damage when your largest customer goes broke.

Credit Risk Management

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Meet Nicholas Samios of Hermes Capital

Prior to founding Hermes Capital, Nick Samios spent twenty five years in the banking and finance industry. He has worked at local and international banks and finance companies and specialised in property, equipment, credit risk management and cash flow finance.

He has worked closely with SMEs from a diverse range of industries and in various business life cycle stages including start-up, high growth, restructure and turnaround.

Being privately funded, Hermes is able to provide the highest levels of flexibility and are bound by common sense and not constrained by institutional bureaucracy. As such, Hermes is able to deliver financing solutions where the banks will decline to help. 

Credit Risk Management

Failed Builder Owes up to $12M‘ was one of the headlines in todays paper – though similar headlines are not uncommon of late. When a large customer goes broke, financial distress can spread like a contagion amongst subbies and suppliers.

What can you do to minimise the damage to your business when one of your largest customers goes broke? Here are five tips I can share from my many years of experience financing accounts receivable.

1. Do your homework

Spend the money on a subscription to a credit agency. There are a few to choose from that offer services to ‘trade credit suppliers’ providing data and alert services that help you make better-informed decisions about who to work for. And don’t forget to google the names of the directors to see if they have a past you should be wary of. Do your homework to avoid surprises.

2. Many baskets

If your largest customer goes broke representing 10% of your business- their failure will hurt, but won’t be catastrophic. If they represent 50% of your business, they may take you down with them.

Taking the time to broaden your customer base may cost you in the short term but can be a sound investment to de-risk your business. The old adage applies – “don’t put all your eggs in one basket”.

3. Halve your terms, halve your losses

If a customer fails owing you for 60 days, you stand to lose twice as much as had they only owed you for 30 days. The maths is a lot worse had they owed you for 90 days!

If the quality of your work is good, you deserve to be paid on the terms that were agreed upon before you handed over your goods, services, labour hours – whatever it is you provide.

You shouldn’t be embarrassed to ask for payment – they should be embarrassed to have put you in that position of having to ask. Halve your terms, halve your losses.

4. Get it in writing

Businesses that have run out of cash will use any excuse not to pay you. Make sure your paper trail is spot on – the customer purchase order, your proof of delivery or customer sign off and your invoice should all match up and provide as much detail as possible to avoid disputes.

Send emails asking the customer to confirm they received everything in good order and save the replies – they make good evidence if it comes to that. A customer making excuses not to pay may have nothing to do with the quality of your work and everything to do with their solvency.

You should also make sure your solicitor has looked over any contracts – better a few dollars now than lose big dollars later. Better still, have your solicitor prepare a credit application form incorporating trading terms and if possible, the ability for you to take security and personal guarantees. Don’t give them room to wiggle – get it all in writing.

5. No dough, no show

If you supply goods or services to your customer on a regular basis, there has to be a point at which you ‘stop credit’. Make sure you are not breaching any contractual terms of course, and if you are in the construction game, follow the security of payments act very carefully.

Businesses feel compelled to continue supplying for the sake of ‘relationship’. But in business, if you are not getting paid and your business is suffering as a result, there is no relationship and you are at risk of throwing good money after bad. Adopt the policy of “no dough, no show”!

In conclusion

Consider credit insurance – it will address many of the points above and impose disciplines on your admin that will address the others.

At Hermes, we subscribe to credit agencies and a credit insurance database and have our broader client portfolio history to draw data from to assist our clients with their credit decisions.  And of course, we provide guidance based on our own experience as required.

Taking risks is part of running a business, but the steps above will save you from leaving everything to chance.

Authored by Nicholas Samios RTA®

Founding Director and Fund Manager and Enterprise Investor

Hermes Capital
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