Credit Risk Management: Role in Success of MSMEs
The Role of Credit Management in Ensuring MSME Business Growth
credit risk management: Recent studies show that at least 1 in 5 MSMEs fail to operate due to the accumulation of bad debts. The consequences of credit risk are not limited to financial instability, as it also tarnishes your brand’s reputation in the market. Hence, credit risk management has gained significant relevance in MSMEs, enabling businesses to achieve their goals sustainably.
Read forward in this blog and explore the significance and key benefits of credit management for the success of small to medium-sized businesses. Also, discover proactive measures to create a robust credit management system.
What is Credit Management?
Credit management is a comprehensive approach to identifying, assessing and controlling the risk of non-payment or delayed payments by customers. Before the extension of credit, the lender sets clear policies, payment terms, and conditions, enabling the customer to pay on time and in full settlement.
Why Does Credit Risk Management Matter for MSMEs?
Taking proactive measures to mitigate credit risk is key to the sustainability of small businesses. While it reduces bad debts, the impact of effective credit risk management is profuse. Read the following points to learn the importance of credit risk management for small businesses:
- Stable Cash Flow
Enough cash flow enables a small business to meet its daily operational costs efficiently, increasing overall business efficiency and productivity. Not keeping track of the money outstanding from your debtors keeps your capital locked, which can otherwise be used in lucrative opportunities.
You must also keep track of the money your suppliers owe you. This will help you avoid missed payment penalties. Hence, collecting timely payments on extended credit results in healthy cash flow and liquidity.
- Competitive Advantage
As a small business, if you manage credit risks effectively, you can offer better credit terms to your customers. This can provide you with a competitive edge in the market.
Moreover, credit risk management allows you to demonstrate reliability and financial prudence, enabling you to differentiate your brand. Hence, effective credit management offers a strategic opportunity to enhance your business’s overall performance and gain a competitive advantage.
- Sustainable Growth
Implementing the essential steps of credit management, including customers’ creditworthiness assessment, setting payment reminders and adjusting credit policies, enables you to plan and allocate resources efficiently.
This strategic approach promotes sustainable business growth. It also allows small businesses to take calculated risks, fostering the spirit of growth and expansion without jeopardising financial health.
- Enhanced Brand Reputation
While credit risk management improves your company’s liquidity and mitigates cash flow challenges, it also makes your business seen as a reliable credit source. Managing credit risks effectively are perceived as credible and trustworthy by suppliers and potential customers.
It influences customers’ ability to avail credit and fosters trust in setting up partnerships. Hence, a good reputation in the market enables results in more favourable business relationships.
What are the Key Benefits of Credit Risk Management for MSMEs?
The key benefits of effective credit management are reduced bad debts and improved business cash flow, however, it provides more benefits to small businesses. Check the following points to know more:
- Reduced Incidence of Bad Debts
The integral part of credit management starts with evaluating the creditworthiness of customers before extending them the credit.
This helps to reduce the incidence of bad debts while ensuring that MSMEs do not lose money on unpaid invoices. Eventually, this helps in maintaining healthy financial records.
- Access Financial Flexibility
Receiving timely payments from customers leads to improved cash flow. This allows you to meet financial obligations promptly. Additionally, sufficient cash flow enables you to handle cash crunches confidently, while ensuring operational stability.
- Enhanced Investor Confidence
Efficient credit management practices ensure investors of your business’s ability to manage financial risks. Hence, it increases the sense of trust between you and your potential investors, making them invest in your business projects.
- Cost Savings Opportunity
Implementing best practices in credit risk management avoids unnecessary legal costs associated with chasing unpaid invoices. Additionally, it also reduces the need for extensive credit control measures, enabling you to deploy resources for other business activities.
- Improved Decision-Making
Robust credit management offers MSMEs a clear understanding of credit risks. This enables you to make informed decisions about extending credit, expanding operations, or investing in new projects. Hence, this financial approach reduces credit risks and maximises growth opportunities.
Guidance for Effective Credit Management
After gaining deep insights into the importance of credit management for small businesses, are you looking for some practices? Check the following points that will guide you through implementing an efficient credit management approach:
- Establish a Credit Policy
The foundation of credit management is marked by implementing a credit policy. Outline the terms and conditions for extending credit to customers. Ensure communicating the credit policies effectively to your customers, new and old, maintaining transparency in your relationship.
In addition, you must ensure that all of your employees are aware of the new policy. Make sure that they adhere to them, maintaining consistency in credit practices.
- Perform Credit Assessments
Evaluate the creditworthiness of your customers before credit extension. Go through their payment records, existing debts and recent hard inquiries.
Relying on this information will help you assess their borrowing behaviour. This proactive strategy also serves as a preliminary screening test for evaluating credit risk.
- Regularly Monitor Credit Terms
Exercise the habit of regularly reviewing and adjusting credit terms based on the financial health and payment behaviour of your customers.
For example, if they are struggling to pay in full and on time, communicate with them about their financial issue. You can also offer discounts on their invoices, which will encourage them to make timely payments.
- Review Accounts Receivables
Keep a close watch on accounts receivables and follow up on overdue payments promptly. Train and educate your employees and keep track of the debtors who are yet to make payments.
You can also implement a credit management system that will streamline the process of regular monitoring and collection of outstanding debts.
- Consider Credit Insurance
Credit insurance is a business insurance type that protects against the risk of delayed or non-payments by customers.
It is heavily essential for small businesses to improve cash flow and protect your business’s financial stability. It therefore provides a safety net and covers a substantial percentage of the defaulted amount.
Final Word About MSME Credit Risk Management
Effective credit risk management is crucial for the sustainability and growth of MSMEs. By implementing robust strategies such as assessing customers’ creditworthiness, using credit insurance, and regularly reviewing credit terms, small businesses can reduce bad debts and enhance their market reputation.
Start your journey towards better financial health with Kogta Financial today. Reach out to our team for further guidance.
