A new report from Goldman Sachs says that 88% of U.S. small business owners have exhausted their Paycheck Protection Program (PPP) loan. However, almost two-thirds of those businesses have found other revenue sources such as producing personal protective equipment and contributing to the development and distribution of a COVID-19 vaccine.
Despite creative approaches to staying afloat such as these, more than 32% of businesses that received PPP loans have cut wages or laid off employees. Another 36% claim they will have no choice but to do the same if the government fails to pass additional measures to help them out financially, and 30% will have depleted their cash reserves come the end of 2020.
Unfortunately, companies that extend credit to other businesses are actively trying to manage their own portfolio risk during this time, but often don’t know which of their accounts are at greatest risk of impact due to the COVID-19 pandemic. If you are responsible for repayments at your company, you may already be dealing with this uncertainty. But there are things that can be done to manage exposures effectively during this challenging time.
Here are four of them:
1. Analyze your Portfolio
You need to analyze your portfolio to seek solid dependable data that you can leverage to identify your most significant vulnerabilities so you can better plan for possible negative occurrences. The kinds of portfolio data that can go into your analysis should include firmographic and geographic classifications like NAICS/SIC, number of employees, sales, years in business, as well as payment information like aging and credit utilization.
Many of today’s tools feature easy-to-use dashboards that allow you to make comparisons against your own portfolio data. You can also obtain a variety of scores to assess financial stability, risk and probability for recovery which are all valuable for benchmarking and deeper segmentation. Only with a thorough, methodical portfolio analysis comes deeper, predictive insights and improved planning.
2. Locate Potential At-risk Customers
You can do that by classifying them by industry segment:
- Identify those that are in the segments which have been most impacted by the pandemic, such as travel, tourism, lodging, food service, and entertainment, as they are highly likely to encounter financial challenges throughout the pandemic.
- Identify those that are in the top 10 industries with highest portfolio exposure/credit utilization. If you have customers in those industries, sort them by state and county and keep a close watch on them.
3. Monitor your Portfolio
Proactively and consistently monitor your portfolio for emerging and/or high risk events such as:
- Deteriorating late payments
- Declining credit scores
- New liens
- New collections
As your A/R ages over the next few months, late payments may begin to sharply increase as customer difficulties continue to emerge. The good news is, you can be alerted in real time when changes to a customer’s financial health occurs. Today there are technologies available that offer a holistic view of your customers’ finances.
With proactive notifications on numerous events such as late payments, changes in Days Beyond Terms (DBT), and score degradations, you can monitor your highest risk accounts and be notified when events occur outside your A/R portfolio.
4. Focus on High-risk Exposures
When it comes to collections, focus your resources on the high-risk exposures you’ve identified in order to generate payments and maintain cash flow. This can be accomplished by increasing bad debt reserves and adopting more flexible payment terms as customers request more leniency on payments due to their current financial difficulties.
With vaccines being distributed, there is a sense of optimism that this pandemic may finally get under control sometime this year. In the meantime, with these tools, you can mitigate your risk and reduce your exposure to ensure your own financial stability throughout the new year and beyond.
