Last week, CFO magazine had a great article - How to Slash Your Credit Exposure - that discussed reducing the risk to your company brought on by the credit crunch. According to CFO, this predicament is due to:

Until recently, when debt became more expensive and harder to come by, companies generally had a blasé attitude toward managing their trade-credit risk. “Most corporations, big and small, don’t have credit risk procedures any more sophisticated than the subprime lenders did,” writes Pam Krank, president of outsourcing company Credit Department Inc.

As we’ve discussed here, this risk is often brought on when suppliers are pushed by Buyers to extend terms, either officially or just through being paid late. And to add insult to injury, those longer payment cycles are often unnecessary. Again to quote CFO:

Some customers may be withholding their payments, not because they’re in dire straits, but out of fear that their banks will pull credit lines or not lend to them in the near future.

In other words, buyers have room to pay earlier (especially if the supplier can make it worthwhile through discounts), but are choosing not too right now. This can be a tricky subject for suppliers to push on Buyers as they are their customers and demanding shorter terms or cash up front could damage the relationship long term. As CFO put it:

Problem is, suppliers - and especially small businesses - need to tread carefully before pressing clients to pay up. Every company wants to keep their most valuable customers and not lose them to disagreements or hurt feelings over payment terms.

While the article gives a lot of good suggestions for managing overall credit exposure from their receivables, there are a couple arrows suppliers can add to their quiver:

• Shorten Payment Cycles - Suppliers can achieve the same result of increasing cash flow, closing out receivables and shortening DSO by utilizing the carrot of collaborative Dynamic Discounting, or by selling their receivables outright at auction.
• Utilized 3rd Party Financing - If early payment discounts are not an option for the buyer, encourage them to engage 3rd party financing so they can hold onto their cash as long as possible.

The danger is real, as we’ve seen by the daily stories of business bankruptcies and liquidations. But there are options that can help smart businesses see their way through the current crisis.

Drew Hofler is the Senior Manager responsible for Ariba’s Financial Solutions suite of products. In addition to extensive experience in banking and financial services, Drew is ACH Accredited and held Series 7 & 63 NASD certifications.