The uncertainty of when the economy will open up and how fast it will open is part of the new normal you need to adjust for in making credit decisions. Non-essential businesses are subject to total or partial shutdown of unknown duration. Forecasting revenue and cash receipts from customers in non-essential businesses has become very difficult and requires consideration of the change in business conditions. As a result, credit risk has ratcheted up across the board. It has increased for many businesses, particularly those in the hardest hit industries and geographic areas.
Creative approaches to providing credit to deserving customers are needed to keep business going now and as the economy opens up. The challenge for credit managers is how to mitigate credit risk in the face of the very difficult business environment. One option to consider is the use of installment plans, an old solution which may serve well in the new normal.
Here are some suggestions on how to mitigate credit risk in business with installment plans.
Installment Plans
Paying in installments has been used for over 100 years. It is a tool which can mitigate credit risk for sellers and make it easier for customers to pay for a purchase. Installment plans are agreements in which customers pay for a purchase with several payments or installments over a period of time. An initial payment is usually made when the installment plan is opened, followed by additional payments at set intervals until the last payment is made.
Installment plans mitigate credit risk for sellers by obtaining an initial payment up front and reducing the balance owed with each payment. Customers who agree to make payments under installment plans are also more likely to pay as agreed compared to open account purchases.
Installment plans are legal agreements and may be subject to laws and regulations so be sure to review your installment plan with an attorney.
Payment Terms
Payment terms in an installment plan determine the amount of credit risk you are taking. The amount of the installment payments and the interval of time between payments impact the amount and duration of your exposure.
Larger installment payments reduce the number of payments needed to pay off the balance. Shorter intervals between installment payments reduce the duration of your credit risk.
You need to find a happy medium where installment plan payment terms are consistent with your appetite for credit risk and your customer’s ability to pay on time.
Auto-Pay
It is always a good idea to include auto-pay as part of your installment plan. Auto-pay is extra insurance that an installment plan will be paid as agreed.
Managing credit risk in the new normal will be challenging. You will be more successful in managing credit risk if you use the technology solutions available in cloud-based credit and collection platforms.
Lockstep Collect is a market leader in cloud-based credit and collection platforms. Lockstep Collect can help you with the technology you need to manage credit risk in the new normal.
If you would like to learn how you can benefit from credit and collection platforms, please contact Lockstep Collect.
