Small business creditors have been facing an uptick in delinquent accounts in recent months. To address this issue, you first must identify the causes. Once you understand the what, who, and why, you can start determining how to manage the problem.
Many creditors have noted the spike in delinquent accounts. More borrowers are late or missing payments entirely, and the majority of these borrowers are small businesses. Smaller companies in particular are at risk of suffering major consequences when missing payments, as lower credit scores mean fewer opportunities for loans and less financial trust in general. There’s pressure on both borrowers and creditors to resolve delinquent accounts quickly to prevent more revenue loss on either side.
The past few years have been an economic nightmare, and many companies — especially small businesses — are starting to feel it. Supply chain issues and the harm they inflict upon small companies cannot be ignored. A lack of supplies and inventory means less revenue generated for businesses. With fewer supplies and less inventory, businesses have a hard time making up the cost of stocking their stores. Unfortunately, this situation does not look like it will be solved any time soon.
Beyond the supply chain, the economic climate has been growing more hostile to small businesses. Inflation has been rising, making it difficult to find new customers. Small companies also don’t have the resources to fall back on like major corporations do. With these issues at the forefront, small businesses can struggle to manage payments, ultimately putting them at risk of increasing debt and dangerously low credit.
While there’s no quick and easy solution to rising commercial delinquencies, reasonable accommodations and workarounds can help manage the issue. Communication, as always, is the most important element. Maintaining contact between the lender and borrower is essential. For creditors, late fees and the times they’re added should be communicated to the borrower upfront rather than being applied without warning. Borrowers can provide context to help lenders understand why a payment is late or missing and work together to devise a feasible solution for both parties.
If a business is experiencing financial difficulties, offer a payment plan to help them meet their obligations over time. This tactic can prevent the delinquency from becoming a long-term problem. If a company is seriously delinquent, consider negotiating a settlement for less than the full amount owed. This will allow you to recover at least some of the outstanding debt and avoid a complete loss.
Consulting with a credit adviser is another effective approach. Professional credit consultants can provide insight to help manage credit risks and develop plans when delays occur. They are specially trained to understand and find answers to difficult questions.
Flexibility will be key. Rigidly clinging to a payment plan with no room for adjustment is idealistic at best and harmful at worst — for both lenders and borrowers. Be willing to adjust, make detailed plans, and negotiate with borrowers to adapt as things change.
Creditors should also review their financial management practices to identify areas contributing to delinquencies, such as poor cash flow management, ineffective credit policies, or inefficient collection processes. By addressing these issues, businesses can reduce the risk of delinquencies occurring in the future.
Minimize the damage
With the economy in an unstable period, small businesses are struggling to make timely payments. Creditors are forced to make accommodations or waste precious time and resources chasing down money that may simply not exist. Now is not the time to stick too closely to any one principle. With constant communication and the help of a credit consultant, both lenders and borrowers can work to minimize the damage.