Podcast
Questions and Answers
What is the preferred type of guarantee from the seller's viewpoint?
What is the preferred type of guarantee from the seller's viewpoint?
What is required of the seller in a guarantee of collection or performance?
What is required of the seller in a guarantee of collection or performance?
What is a potential issue with a small business owner personally guaranteeing a payment?
What is a potential issue with a small business owner personally guaranteeing a payment?
Why might a personal guarantee be appealing to a seller?
Why might a personal guarantee be appealing to a seller?
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What can be a useful alternative to a personal guarantee from a small business owner?
What can be a useful alternative to a personal guarantee from a small business owner?
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What is a potential advantage of a third-party guarantee?
What is a potential advantage of a third-party guarantee?
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What should be requested when researching the possibility of a third-party guarantee?
What should be requested when researching the possibility of a third-party guarantee?
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Why might a seller require a personal guarantee from a new business customer?
Why might a seller require a personal guarantee from a new business customer?
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What is the primary goal of credit risk reduction techniques?
What is the primary goal of credit risk reduction techniques?
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Why is credit risk important?
Why is credit risk important?
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What is the main purpose of payment guarantees?
What is the main purpose of payment guarantees?
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What is credit risk?
What is credit risk?
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What is the benefit of using a mix of credit risk reduction techniques?
What is the benefit of using a mix of credit risk reduction techniques?
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What is one way to retain ownership of goods?
What is one way to retain ownership of goods?
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Who can provide a payment guarantee?
Who can provide a payment guarantee?
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What is the result of offloading ownership of an invoice?
What is the result of offloading ownership of an invoice?
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Study Notes
Credit Risk Reduction
- Credit risk reduction techniques can significantly reduce bad debt for a company.
- Effective risk reduction alternatives allow a business to issue a large amount of credit to customers while minimizing receivables risk.
What is Credit Risk?
- Credit risk is the risk of loss due to a borrower's failure to repay a loan or meet contractual obligations.
- Credit risk is a major risk faced by banks and other financial institutions, impacting their financial health and stability.
Classification of Risk Reduction
- Find alternative payer: someone besides the customer becomes liable for payments or pays insurance for bad debts.
- Retain ownership: retain legal interest in goods sold to recover them in case of default.
- Offload ownership: transfer ownership of an invoice to a third party in exchange for cash, transferring default risk.
- Pay early: a mix of these tools can achieve significant bad debt risk reduction.
Payment Guarantees
- Main sources: owner of a business, a corporate parent, fellow subsidiary, or a third party.
- Two types of guarantees: Guarantee of Payment and Guarantee of Collection/Performance.
Guarantee of Payment
- Preferred type from the seller's viewpoint.
- Seller can protect payment from the guarantor without first attempting to collect from the buyer.
Guarantee of Collection/Performance
- Requires the seller to first attempt to collect from the buyer, then pursue collection from the guarantor.
Owner of a Small Business as Guarantor
- May be willing to personally guarantee payment using personal assets.
- Problems with this approach:
- Owner's net worth may be closely tied to the business's fortunes.
- Owner may have issued personal guarantees to many suppliers.
- Demanding a personal guarantee may not foster long-term loyalty.
If Business is a Subsidiary
- Obtain a payment guarantee from the parent company.
- Parent entity may have more assets, making it an excellent backup payer.
Guarantee from a Third Party
- May be a related party with an interest in the buyer's operations.
- Assets of a third party may not be closely tied to the buyer's fortunes.
- Request documentation of the third party's net assets and preceding guarantees.
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Description
Learn how to reduce credit risk and minimize bad debt recognition. Understand the importance of credit risk management and its alternatives in business.
