Credit Risk immediately sounds like a term which should strike fear into business owners everywhere. Nobody wants to hear the word risk when associated with your business, but it needn’t be that way and today we are going to speak to you about managing your credit risk.


Credit risk can be simply defined as the potential that a borrower may fail to meet financial obligations on previously agreed terms. The main goal of the Credit risk management systems we will be speaking about today is too secure overall credit risk parameters and ensure that neither borrower nor lender suffer as a result of these risks. Managing your Credit Risk can have great benefits for your business including increasing cash flow, increasing credibility, better business development, and more secure trading options to name but a few. Having this backing may also give you peace of mind in terms of the security and longevity of your company.


Following the financial crisis, borrowing and lending became a financial minefield, and whilst things have since eased up and more options have recently become available for both parties, the need to be vigilant remains. 25% of all bankruptcies are caused by unpaid invoices, so you may be currently taking more risks than you were aware of. The risks associated with borrowing and lending have not eased as much as one might expect in recent years, and both parties must be aware of the dangers associated.


Some Credit Risk Management companies offer to advise and protect clients in order to allow safe trading, effectively insuring a company’s finances ahead of trading. The first step in Credit Risk Management is to gain a full and comprehensive picture of the company’s finances and position as well as having a solid idea of the company’s ability to lend to customers. Having this comprehensive picture then allows the creation of an appropriate action plan for managing your credit risk, having a simple plan in place will then pave the way for more sophisticated credit management solutions in your company’s future.


Credit insurance is one fairly simple way to manage your credit risk which may assist your company in growing profitably. Cash flow is the most important and also the most vulnerable aspect of business and credit insurance could give your company peace of mind against any bad debts. Credit insurance insures your company against the potential of your customer’s failing to pay their debts within your agreed parameters. This in turn ensures that your company finances and risk scores do not suffer when it comes to your own future borrowing. Non-payments are one of the top ways in which your business can be weakened, and Credit Insurance can be the ideal way to navigate this issue. In this way, you are assured that your company will reach its anticipated targets even if there have been some defaults.


If you find yourself in need of advice, support, or guidance in how to go about credit risk management in your business please don’t hesitate to contact us here at DCA Accountants where we are always happy to help.


Q: I’m in the early stages of a potential career change, opening my own food service business at the age of 45. While I have good equity value in my home, and have never failed to pay my mortgage, most of my savings are locked away in a pension fund, so I will need to borrow quite substantially to meet start-up costs. One of the options I’ve been considering is a franchise – while this would add to the costs, it would help me hit the ground running. I’m also hoping that it will make credit easier to obtain – am I right?


A: Depending on the franchise, you may well be. In fact, some franchising organisations have a scheme to offer start-up credit to their franchisees, though you’ll usually need to put up some of your own cash to participate. Perhaps it would be viable to take out a personal loan, or borrow from friends or family?


Failing that, banks will of course take the benefits of a franchise into account when they’re evaluating a loan application – particularly if you’re talking about an established brand, that reassurance that you’ll have customers who know you from day 1 is very good. They will, however, be aware of the downsides: higher ongoing costs and a less-flexible business model. You can find quite a useful pointer on the pros and cons of franchising – particularly in the food service space – here. Your business advisor in the bank should be aware of these points, and they will feed into the approval decision.


In short, a franchise won’t get you finance on its own: you’ll still need a solid business plan and a good lending proposition. But it will answer some of the questions that a bank immediately has about your potential market, and – depending on the kind of documentation provided by the franchisor – can add credibility to your projections. A good credit history and equity in your home will also be in your favour.


We advise a lot of businesspeople – and potential entrepreneurs – in the early start up stages, as critical decisions made at this juncture have a major impact on your business going forward. If you’d like to set up an initial, no-obligation chat about your options, just  contact us to set one up.


Declan Dolan


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