For a creditor, debt recovery is a critical operation, particularly when a debtor is dealing with multiple creditors. The creditor must recover from each account as much as possible of what was lent to the debtor and still remain in business. However, the way to do this, it seems, is to limit the debtor’s credit risk by cutting off his or her access to the cash that they need.
The purpose of any recovery operation is to minimise credit risk. In other words, the more a creditor knows that his or her ability to collect on a loan is limited, the more easily they can “buy time” and prevent the debtor from making problems for themselves.
What happens when you or a client is highly sensitive to credit risk? And how can you effectively minimise credit risk in the recovery of commercial debt?
Usually, lenders have a “light touch” in relation to credit risk. They are aggressive only when you (or your client) have very minimal liquidity. When this is the case, a lender will do all they can to recover as much as they can. You, therefore, are typically in an aggressive recovery phase.
What can you do to minimise credit risk in the recovery of commercial debt? You can:
Control Your Debtors Book – One of the most effective methods of minimising credit risk in the recovery of commercial debt is to make sure that all accounts are tracked correctly. By doing this, a creditor can make sure that a debtor is not using your accounts to facilitate non-payments.
If you have control over your debtor’s book, then you know where they are spending their money and when. You can, therefore, use the resources of a database to find out about their spending habits.
When a creditor does this, they reduce the amount of credit risk in the recovery of commercial debt. You will know how much cash your client has left, and you can work to either increase the amount, or reduce the amount of it available to them.
Monitor Account Activity – A creditor can also effectively minimise credit risk in the recovery of commercial debt by following the activity of the debtor. For example, if a client has never dealt with a particular credit agency before, the creditor will have a hard time following their spending habits. However, if the creditor knows who the client is, and has done business with the agency at some point, they can monitor that client’s spending habits.
This will tell the creditor where the debtor has most likely spent the most, and what that money was used for. If they see that the debtor has purchased goods and services in a specific manner, then they can consider reducing the amount of money that they lend to that client.
Having a system in place to ensure that your clients spend wisely, and minimise credit risk, will be very helpful to you, in the recovery of commercial debt. The more you know about your client’s spending habits, the better chance you have of recovering more of the debt.
When you control your debtor’s book, your creditor knows where they are spending money and when. They can use the resources of a database to find out about their spending habits.