I am looking for information on best practices to analyze credit risk for hospitals, surgery centers, etc. in which we are being asked to provide medical supplies. What is best practice for getting data to analyze credit risk and establish credit with our company? Especially in situations where they are not public and financial information is not available.
Cheryl, thanks for your question. I hope the Community provides you with a combination of ideas that will help. Every trade creditor assesses acceptable credit risk based on its own standards and risk tolerance. So, the answer to your question is, as the lawyers say, it depends.
Having some experience with this over the years, I will offer several suggestions.
As I am sure you know, in addition to borrowing facilities, hospitals are largely dependent on insurance companies and government entities for their AR turnover and cash flow. By their nature these sources of cash can be sluggish in their turnaround and rife with disputes.
So, the first thing is to break through the fog and get as much information as possible. To determine what to ask, I would start with modeling what your company feels is important. What are the gating factors for an acceptable risk? What weight would you put on each factor to calculate a score. How does a score relate to an acceptable line of credit? All criteria are not equal.
Consider such things as:
-Years in business.
-Positive trade and bank references with trade lines at or above the credit line you are being asked to provide
-Bank references: Available borrowing capacity. Any negative issues. Also, try to find the lender’s loan formula. It can tell you a lot about the risk from the lender’s point of view. A conservative formula, higher perceived risk. A liberal formula, less perceived risk.
-Bureau risk and payment scores. Look for suits, liens, judgements and third party referrals.
Positive feedback from your industry group if you belong to one.
-Your company’s profit on products sold. The higher the profit, the more risk can be justified.
-This may or may not be a concern for your company, but does the volume to be sold to this customer represent a large, concentrated risk in your overall AR portfolio? The higher the concentrated risk, the higher the risk of payment delay or loss.
If you can get financials and other internal data:
-Years with positive cash flow.
-Years of profitability.
-Equity trends. Never own more of a customer’s company via AR exposure than the owners do.
-Benchmark a new customer with similar hospitals or surgery centers in your own portfolio or with other publicly available financials.
-As a consultant working on behalf of my clients, I would try to understand the customer’s AR portfolio. Since this is a customer, in a competitive environment you may not be able to get your customer to provide any or all of the following. Other creditors may not make such requests. In my experience getting the customer’s cooperation is a function of how important they see your company as a supplier. In any event, it does not hurt to ask:
>The DSO and trend over the past 13 months.
>Average days past due.
>Collection Effectiveness Index.
>The amount and percentage disputed.
>The average from identification of a dispute to either a credit is issued, or the balance is collected.
- Connect with their own Credit and AP execs. Ask questions about their process and staff.
- If the exposure to your company is going to be significant, do an onsite visit and walk through. Get to know your counterparts face to face.
- Meet with your Sales Rep/Manager: What is really needed to ramp up a new customer? You don’t need to start with a credit line that exceeds the customer’s needs. You may consider a credit line of 1.5 times the anticipated monthly take rate. If they pay within, or close to terms, you can keep shipping. If they hit the credit line and are past due, you will have leverage to get paid before shipping additional product.
I doubt all the above relates to your situation, but hopefully there are a number of ideas here that you can use. I am happy to help further if needed.
Bob Shultz
Robert Shultz
Chairman Highako Advisory Council
Credit Today Editorial Staff
robert.shultz@highako.com
academy.highako.com
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