How to Reduce Credit Risk with AR Automation

Published on October 5, 2018

We’ve talked a lot about how A/R automation can help businesses save time, reduce errors, scale effectively, and get paid faster. However, there’s another key area where A/R automation workflows pay off: monitoring risk as it relates to customer credit.

Many business-to-business (B2B) companies offer their customers the ability to purchase on credit. Merchants may negotiate payment terms upfront, or just accept the customer’s standard payment terms (as some are non-negotiable). That means delayed payments and reduced cash flow for the merchant.

When businesses offer credit to buyers, they are taking on a big risk. Non-payment on even a small percentage of overdue invoices can impact the company’s ability to function. However, there is a way to be proactive about risk management and still allow customers to purchase on credit.

A/R automation can raise the visibility of credit risks – and keep them in check.

Nearly all of the functions of A/R automation pull in data that’s critical to the quick and easy monitoring of consumer credit risk. Here are just a few examples:

  • Sign-up pages with e-verification provide a written record of the customer’s agreement to key details like payment terms and terms of service.
  • Electronic invoice delivery and subsequent payment details offer a window into the customer’s payment history.
  • Automated invoice chasing shows how many reminders were sent before the customer paid the invoice.
  • Pre-programmed discounts and penalties demonstrate whether the customer responds to incentives.
  • Dunning management tools show how many attempts were made before the customer entered new credit card information.

Businesses can leverage the power of all this customer behavioral data to better understand which customers present the most risk, and how they might reduce risk with proactive strategies.

Companies can monitor risky customer behaviors and take steps to curb them.

That means viewing reports on all outstanding and past due invoices for specific time periods, to start, and digging into the “why”. Let’s say a particular customer is routinely 30-60 days past due on their invoices. This customer is on the business’s radar as high-risk. The business may decide to take some combination of the following steps:

  • Check the customer’s contract details to see if payment terms are correctly recorded.
  • Contact the customer to make sure the right person is receiving the invoice, and that person is aware of the payment terms.
  • Consider adding an early payment discount or late fee to see if it improves payment timelines.
  • Ask the customer to opt into Autopay for future payments.
  • Offer additional payment methods to speed up the process.

Merchants can also look at the other side of the equation by analyzing businesses that have low risk. These are customers that always pay on time, never need a reminder, and respond to inquiries quickly. Merchants could investigate what these customers have in common. Maybe they are in similar industries, purchase the same products and services, or agree to the same payment terms.

Whatever the similarity is, the business may decide to focus on selling to more customers with lower credit risk. The sales team could begin to primarily target customers in the pharmaceutical industry, for example, or focus on selling more software and less consulting services.

Merchants can also make plans to phase out customers with higher credit risk. Maybe NET 90 payment terms are a big problem for cash flow purposes. The business could decide to notify applicable customers that NET 30 will take effect at the end of the next billing cycle.

Once merchants launch A/R automation, their time spent on manual A/R tasks will likely drop dramatically. With that free time, A/R staff can look into the wealth of data collected for opportunities to understand and reduce credit risk.

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Published on October 5, 2018

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