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Risk Management in 2021: How the World’s Volatility is Changing the Landscape

As we move into 2021, it’s safe to say that no one has a good handle on where the world’s economy is headed. Sure, there are plenty of opinions, and you may have your own theories, but 2020 taught us that we don’t know as much about the future as we previously believed.

So, when it comes to risk management, where does that leave us? How should you approach your credit management in the years to come? Now is a good time to take a deep breath, review the situation, and come up with a plan to move forward with confidence.

Returning to Your Lending Fundamentals

For many businesses, the pandemic has served as an unwanted wake-up call. It’s easy to allow your business to coast in many different areas, but any coasting that you were doing was suddenly brought to a halt early in 2020. For your B2B lending practices, this is a good time to get back to the fundamentals of managing credit.

  • Establish and maintain relationships. This is perhaps the most basic of all fundamentals in B2B lending for an industry like home furnishings. You are likely dealing with a limited number of clients, and as such, you want to create relationships with those businesses so you can work together effectively. It’s when you lose touch with these accounts that problems tend to develop. Keeping in touch will help you spot signs of trouble before they become major issues.
  • Assess accounts regularly. Our second point ties in directly with the first. Establishing a regular routine of assessing the condition of all of your credit accounts and making any adjustments to those accounts as a result of your review, is important. For example, if an account seems to be struggling to keep up at its current limit, pulling that limit back for a period of time is an easy way to reduce exposure in an uncertain market.
  • Revise lending criteria. The criteria you use to issue credit are the backbone of your lending program and the foundation of your risk management plan. Given how dramatically things have changed in the last 12 months, it would be wise to review your lending criteria. That doesn’t necessarily mean you need to use stricter criteria, however. In fact, it might be necessary to loosen your standards slightly, given the struggle that everyone faced in the early days of the pandemic.

The Limitations of Metrics

You likely make most of your credit decisions based on a set of metrics that evaluate the creditworthiness of the borrower. That’s a great place to start, but the pandemic has thrown those metrics into turmoil. The numbers you see on paper for a company’s performance in 2020 are badly skewed by the situation and may not reflect the health of the business at all.

This is where we come back to the value of conversations and relationships. To some extent, you are going to have to lean more heavily on personal contact and honest discussions, since recent business performance metrics just aren’t going to be very useful. You don’t need to throw all the numbers out of the window but use them within the context of the larger picture and consider all angles while making credit decisions.

Avoid Panic

Pandemics come and go. The last year has not been anyone’s idea of an ideal world, but better days are to come. With the big picture in mind, resist the temptation to panic and make drastic, reactionary changes to your lending procedures. Retreating into extremely tight lending rules probably isn’t the best option – and neither is offering credit to anyone and everyone who asks. Making small changes based on market conditions is wise but be patient and work together with your clients to arrive at a brighter future together.

 

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