How to anticipate payment defaults

A large number of SMEs are burdened by litigations. They make significant losses and expend considerable effort to ensure that their invoices are paid.

Numerous companies have reported that payment discipline is worsening. According to the European Payment Index 2017 (EPI), which is based on a survey of several thousand companies in Switzerland and 25 European countries, the number of late payments and unpaid invoices has increased in Europe, but the total sum of debts has dropped in Switzerland. This study also shows that in Switzerland, the average invoice payment period is 30 days for households, 34 days for corporate clients and 39 days for the government.

More information on the EPI

Underlying factors

The customer is always willing to purchase more, to the delight of companies. But they should not underestimate the underlying risk of defaults on payments and debtor losses. The EPI highlights several factors that explain this development. The main factor is the negative evolution of certain values: reminders, starting legal proceedings and private bankruptcies are currently seen as small potatoes. The second factor is the need for enjoyment: we make purchases because we want an item, without thinking about the real financial consequences.

The third factor often mentioned is that invoices are paid selectively, depending on the supplier, product or service. The need to make a subsequent purchase from the same supplier and the personal relationship built up with the supplier plays an essential selective role. A lower subsequent purchase rate means that the emotional relationship with the supplier is weaker and, therefore, more invoices are paid late or even not at all.

Identifying the risks upstream reduces costs downstream

The conclusions from the EPI show that companies that invest heavily in order to address their litigations prioritize upstream measures vis-à-vis the credit management process: reminder letters, starting legal proceedings and negotiating certificates of indebtedness. Companies that invest less in litigation take action upstream. They reduce the risks by identifying them before the sale—by verifying the customer’s solvency, for example—and offering dynamic payment conditions or a two-stage credit limit.

This is proof that to avoid risk, you first need to identify it. In an ideal scenario, risk analysis starts from the acquisition and offer. In any event, a risk analysis should be performed before the order is fulfilled. The following aspects are essential for companies of every size.

Precise evaluation of private households

Many Swiss households have solvency issues. If your company has outstanding debt with a household in this situation, then you are almost certain to incur a loss. By checking customers’ solvency at the right time, you can reduce losses linked to this type of risk.

What about the situation for companies?

The solvency of companies is currently as volatile as that of private households. New companies are launched as quickly as others disappear off the scene. Measuring the good standing of a company is not limited to checking its solvency. You should also take into account elements such as the company’s history and its representatives’ payment discipline.

Better supervision thanks to data pools

SMEs and large companies can now implement efficient credit risk management by limiting fees; for example, by subscribing to a data pool such as the Credit Decision data pool. This database is only available to SMEs and large, accredited companies. Each partner in the pool benefits from information provided by the other partners and undertakes to make information on litigations available. A database like this enables reference values to be set beyond the scope of the company or economic sector. This data is then kept up-to-date. Credit Decision facilitates day-to-day credit and sales decisions. Banks, insurers and large companies all use this service, as well as many SMEs who supply individuals or other companies.

An online inquiry at the point of sale

Companies who are in contact with end clients have to make many instantaneous decisions on credit on a daily basis. This is the case when transactions are made digitally; e.g. for subscriptions, rent or leasing. Identifying the customers and checking their solvency is essential. Key data needed for credit decisions are accessible in real time at the point of sale thanks to a link to the data pool that is integrated into the company’s IT system. Once you get to a certain volume of requests and orders, the online inquiry stage takes too long. Under these circumstances, you should switch to checking customer data off-line on a regular basis (daily, etc.), using their address and solvency information via the data pool. The results of this check are provided as a list of scores, showing the customers who can be trusted and those who should be treated with caution.

Between “once bitten, twice shy” and “an ounce of prevention is worth a pound of cure”, it is better to opt for the second maxim when talking about debtor risk. Analyzing risks upstream protects companies from losses related to payments and sustainably reduces the human and financial resources taken up by litigation.


Information

Last modification 25.10.2019

Top of page

https://www.kmu.admin.ch/content/kmu/en/home/concrete-know-how/finances/accounting-and-auditing/client-insolvency/payment-default.html