How to reduce credit risk in a pandemic impacted economy

The financial impact of the Covid-19 pandemic means now, more than ever, creditors need to actively manage their debtors’ book. Dmitry Osadchiy – Equifax New Zealand Product Manager, Commercial, talks strategies to protect your business.

Q: What are the key things that Kiwi businesses need to know about managing credit risk in the current market?

Dmitry: Firstly, it’s critical to make time to review your credit risk management strategies as whilst they may have been appropriate pre-pandemic, it’s likely that you’ll want to set different parameters that better reflect the current environment.

This should be done alongside a regular review of your debtors book, and checks to ensure that where secured credit has been extended, it has been correctly registered on the Personal Property Securities Register (PPSR). ] The PPSR is an online noticeboard where details of security interests in personal property can be recorded and searched

Q. Has the support for businesses provided by the New Zealand Government helped to reduce risk?

Dmitry: Yes, to some degree it has but it’s only a stop gap. Despite the wage subsidies and small business loans, the pressure on business is enormous. That’s why it’s important to safeguard monies owed and reduce risk on any new credit lines.

Q. What are the options for businesses who are worried about recouping debts?

Dmitry: If creditors are vigilant and have appropriate solutions in place, they’ll be better placed to see the early signs of debtor distress and execute asset recovering actions. For example, we offer business and consumer portfolio management (PFM) solutions that enable creditors to view existing customer books.  

PFM allows us to segment debtors by credit risk, i.e.  ‘good’ (continue to watch if they are becoming bad), ‘early signs of distress’ - contact, verify their situation, and ‘bad’ – execute asset recovery actions.

Q. What if a debtor goes bad – what are the options for recovering assets?

Dmitry: The strategies can be different for secured and unsecured creditors. Recommended actions for secured creditors are:

1. Familiarise yourself with Business Debt Hibernation and other schemes introduced in response to Covid-19. Business Debt Hibernation allows businesses affected by the pandemic to place their existing debts on hold for up to seven months. This helps them to start trading normally again, rather than putting in place processes such as liquidation.
2. Review your PPSR registration policy and make sure all eligible debtors are correctly registered. Check that all entries are correct as one small error can void the registration.
3. Be prepared to move fast if a notice of intent to enter Business Debt Hibernation or worse – into liquidation is received.

For unsecured creditors:

1. Implement stringent credit reviews to identify risky debtors. Equifax New Zealand offers solutions that mitigate risk and help creditors to identify companies that are in financial distress.
2. You may want to consider reducing your credit limits to your biggest debtors. Apply the universal principles of credit risk management: consequences and probability.  Order the debtors from large to small, evaluate associated risks and apply the strategy to manage the risk.
3. Understand your customers’ debt payment trends, i.e. paying more slowly or requested increased credit limit and the severity of industry impact your debtors have experienced.
4. Can you get security on your debts? Some creditors may not realise  they already have some form of a security interest.  One of the most common forms of security from a trade supplier is a retention of title clause in your term of trade agreement.

5.If you’re able to obtain security, make sure you register on the PPSR.

Q. Assuming a business has taken all reasonable steps to protect their assets, what else can be done to identify risk?

Dmitry: Automated solutions such as Business and Consumer Alerts can help identify financial distress. Creditors can receive notifications about their customers’ credit enquiries, payment risk ratings, payment defaults, director changes, receivership, insolvency, court judgments and more.

By using a mix of credit risk strategies and solutions, Kiwi businesses can better navigate the financial impact of Covid-19.