6 Ways to Optimize Accounts Receivable For a Credit Crunch

The banking sector has experienced significant turbulence this past year, so much so that experts now estimate nearly 200 US banks are at risk of collapsing. This data has more experts predicting a credit crunch in the near future. As such, business leaders must prepare their teams to make do with less cash and more expensive credit options, in order to survive.

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While you can’t control larger economic trends, there are several ways to optimize your working capital to weather a tough credit environment.

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Today’s blog shares the six best practices to optimize your accounts receivables and help your bottom line. Before diving into that, let’s first start by looking at what a credit crunch is and why experts are predicting one in the first place.

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What Is a Credit Crunch?

At its core, a credit crunch occurs when banks and other lenders have less capital to lend out to borrowers. Like when a vending machine suddenly runs out of snacks and no one can get any more until it's restocked, a credit crunch makes it significantly more difficult for businesses to borrow money from banks and other lenders.

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During a credit crunch, lenders become hesitant or unable to lend money, mainly because it becomes much riskier to do so. Uncertainty in the economy makes them cautious about giving out loans. As a result, they tighten their lending criteria and often ask for more collateral or charge higher interest rates.

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This lack of available credit can have severe negative impacts on businesses and the overall economy. First off, it hinders economic growth because businesses have less money to spend and invest. With less money in their pockets and fewer external financing options, most companies find it harder to cover the normal costs needed to buy new inventory and equipment or even just keep their doors open.

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Why Experts Predict an Impending Credit Crunch

In a recent panel interview, our very own CEO BC Krishna shared why he expects a credit crunch in the near future, pointing to data published by loan officers at the Federal Reserve. This data shows a spike in the percentage of banks that are tightening their lending standards for small, medium, and big-sized firms:

Photo from federalreserve.gov

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This chart shows us that “easy money” times – when interest rates are low and capital is easily available – typically lead to “hard money” times – when it becomes much harder to get capital. For example, leading up to the housing crisis of 2008, banks were more than willing to give out loans as depicted by the sharp increase on the chart around that time.

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After 2008 and the subsequent economic collapse, banks tightened their standards and the overall percentage of loans quickly fell. Jumping forward, we now see a similar pattern today. The last 10 years have consistently flooded money into banks, facilitating an easy lending market. But now that the Federal Reserve has raised rates at the fastest clip in decades, economic conditions are much riskier and banks don’t want to lend as much. This cliff could lead us right into a credit crunch.

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It’s also important to note that in the same report, the 2023 outlook shows “tightening standards on all loan categories…expected deterioration in credit quality... reduction in risk tolerance… and concerns about bank funding costs, bank liquidity position, and deposit outflows…” In other words, a credit crunch is highly possible in the near future.

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How Does a Credit Crunch Affect Accounts Receivable Teams?

Credit crunches last, on average, between 12 and 18 months – but their impacts on your accounts receivable team can last even longer. For starters, a credit crunch makes it much more difficult for AR teams to collect payments. With everyone tightening their purse strings, overall demand in the market drops and firms have less cash flowing in to pay their bills. As a result, collections take longer and are often harder to secure from clients. It doesn’t help that tighter lending standards and limited credit access make it harder for your team to find quick access to capital if they need to buy time while waiting for their client payments.

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An increase in delinquent accounts and a higher volume of outstanding receivables are two other common effects of a credit crunch. Both of these are bad for your business. As we know well, delinquent accounts can lead to bad debt. As the economy goes through a credit crunch, the risk of customers defaulting on their payments or going bankrupt often rises. This poses a huge risk, as it increases the likelihood that you can’t collect the outstanding payments owed to you by customers.

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6 Ways to Optimize Accounts Receivable for a Credit Crunch

Now that we’ve covered a high-level overview of how a credit crunch affects AR teams, let’s jump into six actionable ways to optimize your accounts receivable function.

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1. Assess Your Current Financial Situation

When it comes to surviving a credit crunch, the first step is monitoring your financial statements over time. Doing so helps your team ensure that your cash remains at acceptable levels for your organization. This includes analyzing your accounts receivable and accounts payable balances.

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Next, make sure to evaluate your cash flows to determine if your company generates positive cash flow from operations. Identify any negative cash flow patterns or periods of cash flow strain, and strategize with your team on how to solve them.

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2. Identify Opportunities to Save Cash

Find areas to cut costs, such as automating manual processes and minimizing costly errors.

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The cheapest way to unlock cash is to look at cash that you already have on your balance sheet. Analyze your accounts receivable balances and assess the average collection period. High receivables and extended payment terms can strain your cash flows. Explore different strategies to streamline collections and improve cash conversion cycles.

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3. Revamp Your Customer Communications

Customers often face financial difficulties in times of economic uncertainty, leading to an increase in queries, disputes, and requests for extended payment terms. Your AR team may experience a higher volume of customer inquiries and payment disputes, so it’s best to revamp your communication to address these concerns.

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Focus on customizing communication times based on each customer’s payment history, and reach out via their preferred contact method. Lastly, make sure to keep contact information for clients up to date.

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4. Communicate and Enforce Late Payment Fees

While they’re never popular with customers, late payment fees are a necessary evil to help your business collect payments in a timely manner. To reduce pushback from customers, make sure that you take the time to thoroughly explain the fee to both new and existing customers. This way, they won’t be caught off-guard down the road.

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When used correctly, late payment fees are a highly effective way to collect payments in a timely manner.

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5. Check (and Recheck) Customers’ Credit Scores

Checking a customer's credit score helps you identify customers with a higher probability of timely payments, reducing the risk of cash flow disruptions. Extending credit to customers who have a poor credit history or limited financial stability can result in late payments or non-payment which ultimately disrupts cash flows, making it difficult to meet your own financial obligations.

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6. Secure an Alternative Funding Source

Alternative funding sources can grant your business access to cash when customers are taking too long to pay. Since you know that the money will come in eventually, alternative funding sources can help you bridge the gap and buy your company a little time. In this sense, they are very similar to using a credit card to buy groceries on Wednesday while you’re waiting for your paycheck to come on Friday.

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One option when it comes to alternative funding sources is Centime Credit. It offers a modern application and approval process (typically offered by online lenders) with the trust and security of traditional banks (thanks to FNBO's backing). Teams that might need extra cash during a credit crunch can lock down access now before borrowing rates increase and credit becomes more difficult to secure.

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Conclusion

Optimizing your accounts receivable processes can help overcome a credit crunch. And, with every challenge, comes an opportunity for your business to improve and grow.

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By strengthening your AR team and managing collections, you can safeguard your business's financial health and thrive in a time when your competitors are struggling. Use the above strategies to help mitigate credit risks, expedite payments, and maintain healthy cash flows even during the most uncertain economic times.

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Accounts receivable automation is the best way to streamline your receivables management. Click the banner below to learn more about Centime's AR automation solution.

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*Centime is not a bank and is not authorized by any federal or state agency to engage directly in core banking activities.
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*All banking products and services available through Centime are provided by FNBO and are governed by the applicable agreements and related disclosures provided to you by FNBO. Member FDIC.
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‍*While Centime facilitates traditional banking activities (such as the acceptance of deposits or extensions of credit), these services are actually provided by our banking partner, FNBO.
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*Centime may provide support services to FNBO, as permitted by applicable law, to facilitate the delivery of its bank products and services.

**Deposit placement through ICS is subject to the terms, conditions, and disclosures in the applicable agreements. Although deposits are placed in increments that do not exceed the FDIC standard maximum deposit insurance amount (“SMDIA”) at any one destination bank, a depositor’s balances at the institution that places deposits may exceed the SMDIA (e.g., before settlement for deposits or after settlement for withdrawals) or be uninsured (if the placing institution is not an insured bank). The depositor must make any necessary arrangements to protect such balances consistent with applicable law and must determine whether placement through ICS satisfies any restrictions on its deposits. A list identifying IntraFi network bank

6 Ways to Optimize Accounts Receivable For a Credit Crunch

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