One of the many challenges of today’s businesses is balancing the need to reduce corporate credit risk, without being overly cautious and missing out on new opportunities. Emerging social and economic challenges as a result of the COVID-19 pandemic underscored the importance of carefully managing credit risk in uncertain times.

Besides tapping on credit bureaus for credit assessment, more and more businesses are harnessing the power of data to make better, fairer, and more accurate lending decisions through KYC, credit scoring models, and monitoring services.

According to the Monetary Authority of Singapore (MAS), credit risk refers to the risk that arises due to the uncertainty of an obligor’s ability to carry out its contractual obligations.

For businesses, good corporate credit risk management leads to tangible benefits, such as reducing losses in revenue, maximising cash flow, and identifying potential opportunities. So it comes as no surprise that businesses turn their attention to solutions that can help them better assess and mitigate potential risks.

Here are ways organisations can manage their credit risk exposure effectively.

Know Your Customer

Known risk is better than unknown risk, which is why KYC plays an important role in verifying the identity and profile of clients before undertaking any professional engagement. In sectors like financial services, where there are strict measures to prevent money laundering, fraud, and other illicit activities, KYC is imperative.

Experian’s KYC solution helps businesses (including non-banking entities) perform the necessary checks and verify that customers, prospects, and vendors are who they say they are, and be assured that they are meeting KYC requirements. More importantly, companies can set favourable credit terms upfront if they can already identify risk indicators or red flags during the onboarding process. 

Modernised digital KYC solutions can help automate the checking process, integrate it into an organisation’s own systems, and streamline the customer onboarding process. Case in point is a leading financial institution in Singapore, which specialises in car finance and leasing and processes about 1,000 new financing applications in a month. By connecting to Experian’s KYC services via API, the company can now verify the identity of their customers quickly and confidently without manually downloading reports.

Use credit scores and ratings to determine creditworthiness

Banks and other financial institutions would normally rely on reports from a commercial credit bureau. Alternative lenders outside of the banking system, however, can utilise tools from a non-banking bureau to help them in their credit risk assessment (read more in our article).

The Experian Non-Bank Bureau enables members to utilise its credit risk scoring solutions to analyse business health, reliability, and payment default risk before engaging in contracts with other businesses. With data contributors from various industries and credit types, Experian Non-Bank Bureau can provide a more comprehensive picture of the customer or prospect.

For young companies or start-ups with a limited credit history, Experian’s SME Network Score helps predict the company’s capacity to pay by combining traditional data and analytics with alternative data and machine learning. It addresses the issue of the lack of rating models for thin-file companies by taking into consideration certain business information like payments and transactions, search and enquiries data, network characteristics and payment performance, and more.

DP Credit Rating, meanwhile, assesses the probability of default among companies in Singapore and can act as an early warning signal for the credit grantor or financier. It can also aid in credit approval decisions and determining appropriate credit terms. The rating can also be used by companies to demonstrate their creditworthiness to suppliers and negotiate credit terms.

For B2C portfolios, Experian’s Alternative Consumer Grade can be used to assess the probability of a consumer (including thin-file consumers) to delay payment.

By setting credit terms based on a lender’s risk score, such as a higher upfront payment or cash-on-delivery (COD) for high-risk firms, you can better  manage your risk exposure.

Monitor key indicators

In today’s context, all businesses need to proactively monitor their portfolio, especially if customers are at risk of delaying payments and showing early signs of credit distress, such as history of negative listing by other lenders, ongoing litigation suits, and less than desirable payment behaviours.

Here are some questions you need to ask when conducting ongoing due diligence:

• How is their financial standing? How are their key financial ratios, such as profit margin, debt to equity, and liquidity?
• Is the company clear of any litigation?
• How well do they pay their creditors? Is their Days Turned Cash (DTC) higher than industry average? Is their DTC on an upward trend?
• What is their known credit exposure?
• Has the company previously been blacklisted?

Through Experian’s Local Credit Reports, businesses can better understand potential customers, automate complex decisions, and minimise risk by having key information, such as business profile, litigation history, audited financial accounts, and property data.

Portfolio Monitoring services let businesses receive timely notifications on relevant customer and supplier events, thus allowing them to respond and take prompt action. Examples of these alerts include: filings for bankruptcy, origination summons, change in business name and information, change in payment records, and more.

Leverage quality data and insights

Business leaders and credit managers know how challenging it can be to make confident decisions on loans and approvals, especially in an increasingly complex and uncertain world.

Credit risk assessment is not the same as in the past, thanks to advances in technology to ingest new data and advanced analytics. Businesses can build more robust risk profiles, enable more SMEs to gain access to financing, and improve the overall customer experience.

Click here to find out how Experian Non-Bank Bureau members can gain the competitive edge by having the ability to offer better terms to those with a good credit profile, as well as use bureau reporting for risk management and an indirect motivation for clients to pay on time.