Credit Risk Management for SMEs: How to Protect Your Cash Flow from Defaults

Selling on credit opens doors to growth, but it turns part of your revenue into “promises to pay”. When those promises are late, the business finds itself profitable in its statements and struggling with liquidity. Credit risk management is the set of decisions and procedures that keeps selling on credit a growth tool rather than a source of risk.

What is credit risk?

It is the likelihood that a customer will not pay what they owe on time, or will not pay at all. Its effects show up as:

• A shortage of the liquidity needed to pay salaries and suppliers.
• Turning to costly short-term financing to close the gap.
• Bad debts written off against profit.
• A weaker credit profile for the business itself when it applies for financing.

1. Put a written credit policy in place

Many small businesses grant credit based on personal relationships. A written policy makes the decision consistent and reviewable, and defines:

• Who may approve credit sales, and the limits of their authority.
• The credit limit and payment term for each customer.
• The documents required before opening a credit account.
• The escalation steps when payments are late.

2. Assess the customer before granting credit

• Request their commercial registration and basic details.
• Review their payment history with you, or with other suppliers if possible.
• Start with a small credit limit and raise it gradually as payments remain regular.
• Do not rely on a single customer for a large share of your credit sales — concentration of risk is more dangerous than its size.

3. Document the transaction in a way that protects your rights

Good documentation makes collection easier and strengthens your position if you need to take legal action:

• E-invoices: The Zakat, Tax and Customs Authority (ZATCA) requires taxable businesses to issue invoices electronically. Phase one (generation) has been in force since 4 December 2021, and phase two (integration with the Authority’s systems) has been applied in waves since 1 January 2023. An e-invoice is an organised, documented record of every sale.
• Contracts and purchase orders: Make sure they clearly state the payment terms and late-payment penalties.
• Electronic promissory notes: The Nafith platform allows promissory notes to be created and registered electronically under the Commercial Papers Law, and is linked directly to the Ministry of Justice’s enforcement system. A promissory note is an enforceable instrument, and completing its electronic elements reduces the chance of an enforcement request being rejected for missing information.

SIMAH: a tool for monitoring risk

The Saudi Credit Bureau (SIMAH) is supervised by the Saudi Central Bank and provides its member institutions with commercial credit reports and an alerts service that notifies them of defaults, late payments or new financing obtained. Understanding this data helps you see how your customers are assessed — and how your own business is assessed.

4. Monitor receivables weekly

• Prepare an “aged receivables” report that classifies amounts due by how late they are (up to 30 days, 31–60, 61–90, more than 90).
• Track the average collection period: how many days does it take to turn credit sales into cash?
• Contact the customer before the due date, not only after it.

5. Set clear steps for late payment

1. A friendly reminder before the due date and immediately after it.
2. Direct contact from the finance department, with a written repayment schedule.
3. Suspending credit sales to the customer until the arrears are settled.
4. Legal action, including enforcing the promissory note through the enforcement courts.

6. Calculate the impact of credit on your liquidity

Before accepting a large deal on credit, ask: Can I fund its cost until the collection date? If the answer requires borrowing, build the financing cost into the deal’s pricing.

How credit risk relates to your own creditworthiness

A business that manages its receivables well has more stable cash flows, cleaner financial statements and a better payment record with its suppliers and financiers — and all of this is reflected in its chances when it applies for financing.

How CBF can help

We assess your receivables portfolio, set up a written credit and collection policy that suits your activity, and build monitoring indicators that give you a weekly picture of the risks before they turn into defaults.

Sources: ZATCA — e-invoicing implementation phases (zatca.gov.sa); Nafith platform (nafith.sa); Commercial alert services — SIMAH (simah.com)