How effective trade credit management drives business success

Trade credit has long been a cornerstone of commercial growth - a mechanism that enables business to flow across supply chains. Yet, despite its ubiquity, many companies underestimate the power it holds as a strategic tool.

Poorly managed, trade credit can strain cash flow, erode profitability, and create operational headaches. Managed strategically, however, it becomes one of the most powerful levers a business can pull - driving turnover, improving liquidity, and creating a competitive edge that is difficult to replicate. Businesses across industries face the ongoing challenge of balancing growth ambitions with the realities of credit risk.

Broadly speaking, companies tend to fall into two camps: those that transfer debtor risk through trade credit insurance, and those that shoulder it themselves. Interestingly, this split is far from even, despite the clear financial logic behind spreading or mitigating risk. When effectively structured, trade credit insurance not only shields a business from non-payment but also frees management to focus on growth and strategy, rather than the constant strain of chasing overdue accounts.

Trade credit insurance does more than simply reduce financial exposure. It covers a range of scenarios, including overdue accounts, business rescue situations, liquidations, and, in some cases, the non-acceptance of customised products. Export policies also protect against political risk when trading in unstable regions.

Coverage typically protects between 70% and 80% of approved debt, although the exact percentage varies depending on the insurer, the client’s industry, and the structure of the policy. By transferring risk to a professional insurer, businesses gain peace of mind and can pursue sales opportunities they might otherwise avoid.

Insurance alone, however, is not a complete solution. In my experience, the most effective credit management strategies are built on continuous information and early warning systems. Sophisticated monitoring tools now operate around the clock, tracking adverse developments across credit bureaus, public records, and legal notices. When potential issues are flagged in real time, credit managers can intervene early, before small warning signs become major financial problems.

This proactive approach protects cash flow, strengthens decision-making, and helps businesses maintain a resilient financial position. Fraud detection represents another critical element of modern credit management.

Fraud is a risk that insurers often do not cover, but it can have a significant impact on both insured and uninsured portfolios. The most effective credit management strategies rely not only on early warning systems but also on robust fraud detection.

Fraud has become an increasingly significant risk, one that traditional insurance policies often fail to cover. By leveraging advanced verification processes, such as online identity checks and secure digital signatures, businesses can ensure that the individuals behind each transaction are legitimate. While no system can eliminate fraud, integrating these safeguards with real-time monitoring significantly reduces exposure, protects liquidity, and enables a truly proactive approach to managing credit risk.

Even for uninsured customers, strong credit practices are essential. A comprehensive, legally compliant credit application form, coupled with detailed reporting on financials, management accounts, and trading history, allows businesses to make informed decisions. In situations where insurers decline coverage or require further information, access to this data can mean the difference between a missed opportunity and a profitable, well-managed sale.

An often-overlooked aspect of credit management is risk-adjusted pricing. Not all customers represent the same level of risk, and pricing should reflect this. Customers with strong financial profiles can receive standard terms, while higher-risk clients may justify higher prices or stricter credit conditions. This mirrors the logic of investment: low-risk options offer stable returns, while high-risk opportunities carry the potential for greater rewards.

By aligning pricing with risk, businesses protect profitability without forgoing growth. The financial impact of disciplined credit management can be substantial. For example, reducing Days Sales Outstanding (DSO) from 76 to 45 days and lowering bad debt from 1% to 0.25% can improve cash flow by millions of rand annually. This freed capital can be reinvested in operations, supplier discounts, or growth initiatives, creating a multiplier effect throughout the business. Beyond the numbers, effective credit management enhances decision-making, strengthens customer relationships, and positions the company as a reliable partner in the market.

Trade credit also enables companies to grow their turnover. Refusing credit may protect the business in the short term, but it risks losing customers to competitors willing to extend terms. Strategic credit management balances risk with opportunity, ensuring that companies can pursue profitable growth without exposing themselves to unnecessary financial stress. In this way, credit becomes both a financial instrument and a competitive lever - a way to win market share while maintaining financial stability.

Trade credit is more than a series of transactions - it is a strategic tool for managing risk, monitoring customer behaviour, and making decisions that drive profitability. Managed well, credit can be a company’s most powerful asset; mismanaged, it can become its biggest liability. Combining insurance, real-time monitoring, fraud detection, and risk-adjusted pricing allows businesses not just to survive, but to thrive.

Mastering trade credit is no longer optional. Companies that understand the interplay between risk, opportunity, and information can turn potential vulnerabilities into strategic advantages. Thoughtful credit management does more than prevent losses: it fuels growth, strengthens liquidity, and enhances profitability. Those who seize this opportunity gain an edge that extends far beyond the balance sheet, solidifying their market position for years to come.

* Knight is the CEO of Debtsource.

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