Disaster planning for credit professionals

Climate change is increasing the frequency and intensity of severe weather events and natural disasters around the world. As of July 9th, the United States has experienced 15 weather and climate disasters in 2024 that have each caused more than $1 billion in losses.

On July 2, 2024, Beryl became the earliest recorded Category 5 hurricane in the Atlantic, surpassing Hurricane Emily’s July 2005 record by over two weeks, according to the National Hurricane Center. While companies often have contingency plans for natural disasters or severe weather events, these plans may not extend to their B2B trade customers.

By the numbers: A recent eNews poll revealed that 84% of credit professionals do not have a formal, written plan in place for handling customers in the event that they are impacted by a natural disaster.

Why it matters: A written plan ensures that the strategies have been well thought out rather than made during an emergency; it ensures decisions and actions taken are even handed.

Step #1: Investigate

In the event of a natural disaster, it is imperative to ensure you are well-informed with accurate and reliable information. Determine the region affected and identify customers in the region. Other tips include:

• Conduct an internal meeting with sales, operations and logistics for overall strategy and response plan.
• Evaluate and assess risk for customers identified in affected area. You can use a basic scoring model to categorize these customers, such as an A, B, C or D template.
• Identify top customers based on sales, outstanding AR, market leadership and credit score.

Understanding the specific vulnerabilities of your customers’ regions can help tailor your disaster plan to provide targeted support and minimize disruptions to business operations. Bea Petrozzino, credit manager at SunCoast Contractors Supply, Inc. (Fort Myers, FL), handles customers affected on a case-by-case basis, as they serve from Louisiana to the Florida Keys. “In the case of a natural disaster, our credit department convenes with management, homeowners and sales to find a way to serve the community that’s been affected as well as protect the company so that we’re here for future weather events,” she said.

The U.S. has many regions that are susceptible to severe weather and natural disasters, including:

• Coastal areas: These regions are at risk for flooding from storm surge and rain, as well as extreme winds. Coastal states like California, Florida, Louisiana and South Carolina are among the most impacted by natural disasters.
• The Midwest: This region is at risk for tornadoes, earthquakes and wildfires. Illinois and Missouri are at risk for earthquakes, while North Dakota and South Dakota are at risk for wildfires.
• The South, Central and Southeast: These regions have historically experienced the highest frequency and cost of billion-dollar disasters. States like Florida, Louisiana and Texas have suffered the highest cumulative damage costs.

Step #2: Communicate

After you have evaluated the situation, make sure to check in with the affected customers to see how they are doing and offer help if they need it. Barbara Roy, CBF, district credit manager at Hajoca Corporation (Baton Rouge, LA), contacts key customers to identify initial needs. “Once we’re aware of how the customers have been impacted, we communicate with the store or company owner and their credit department to determine what we can do to help further,” she said.

Appropriate questions include:

• Are you and your family safe?
• How was your business affected?
• Are you still open? If not, when do you expect to be?

Step #3: Adapt quickly

For customers impacted by severe weather events, credit professionals must adapt quickly to speed recovery. “We need to stay flexible to help the community, provide services and protect our business from prevalent fraud during these events,” Petrozzino said. “Even if a customer follows our terms, the natural disaster event makes us tighten our credit terms even more. When insurance companies are involved, we will ask either for full payment upfront or at least a deposit, which we normally don’t do that with our general contractors.”

In the case of natural disasters, Roxanne Price, CCE, CCRA, NACM Chair-elect and corporate credit manager at H&E Equipment Services, Inc. (Baton Rouge, LA), ensures her team is on standby for their customers and sales to support them. “If they’re in a hurry or it’s urgent, we do everything we can to get the order sent out and make sure we get paid at the same time,” she said. “There may be a delay in getting documents signed and returned to us because the Internet might be down, or they don’t have power. Credit professionals should stay flexible and proactive with a game plan in place during these situations.”

Beware of fraud

Natural disasters can make people vulnerable to fraud, and scammers may pose as government officials, contractors or insurance adjusters to hide their identities. They may contact potential victims by phone, email, SMS or even in person. According to the NCIB, upwards of 10% or $9.3 billion is lost to post-disaster fraud, which not only impacts individuals, but also impacts insurance premiums throughout the industry.

Credit professionals must keep a close watch on new people arriving after natural disasters to ensure they are genuine customers, not opportunists. “While we don’t have a formal disaster plan in place, we have an increased level of awareness of new customers and watch the agings closely to make sure customers aren’t slipping through the cracks,” Roy said.

Step #4: Plan for recovery

Disaster recovery, or business continuity management, involves preparing for and recovering from emergencies to quickly resume critical functions. In B2B credit management, it means asking questions like:

• What is outstanding AR for the impacted customer?
• What it is going to take for the impacted customer to restock, recover? (Restocking, recovery and renovations/repairs)
• Do they have insurance? If so, what kind? (Property, flood, business interruption or FEMA)

The recovery plan options you choose to make available to customers impacted by a disaster may be contingent upon an evaluation of their current account and payment habits. Depending on the circumstances of the impacted customer, consideration can be given to extending payment terms, entering into a promissory note for existing AR, creating a payment plan and securing the customers’ AR to the fullest extent possible through a UCC filing.

It helps to identify open AR in the affected area and increase reserves based on identification and evaluation. Other tips include:

• Create separate agings and identify as higher risk for severe weather or a natural disaster.
• Track communication and progress on Excel spreadsheet and report it monthly to upper management and other departments.

The big picture: Understanding the specific vulnerabilities of your customers’ regions can help tailor your disaster plan to provide targeted support, minimize disruptions to business operations, strengthen relationships and ensure long-term resilience.