Any business knows all too well that a certain degree of risk is involved in the conduct of its operations. This is the reality that banks, alternative lenders, and other financial institutions try to assess, manage, and mitigate with the aim to improve working capital (cash flow) through collections and reduce bad debt, among others.

Unforeseen circumstances, such as the COVID-19 pandemic, have indeed exacerbated financial challenges for consumers and businesses alike. In response, the Singapore government introduced relief measures for individuals and small and medium-sized enterprises (SMEs) to ease cash flow constraints, as well as reduce debt obligations.

However, despite government support there is no denying that the pandemic brought about economic uncertainties that have a tremendous impact on financial stability and job security among consumers. Moreover, when customers are unable to pay for goods and services, the credit risk for businesses also increases.

In fact, results from a study which was part of a  3-part global study conducted by Experian from June 2020 to January 2021--show that 44% of Singapore respondents were concerned about their finances and their employment situation, while 40% face difficulties in paying bills.

These are certainly extraordinary times, with governments and the private sector doing the best they can to alleviate the situation and help businesses weather the storm. Moving forward, however, financial institutions will want to be ready when relief measures taper off. Nevertheless, the Monetary Authority of Singapore (MAS) said that it will ensure a “well-paced exit” of relief measures to minimise the “sharp cliff effects” for borrowers.

What is a commercial credit bureau?

First off, what is bad debt? The term refers to a receivable that is no longer regarded as a collectible because the customer is unable to pay back the loan. Recovering debts may prove to be challenging due to a variety of reasons, such as bankruptcy, disrupted operations, and stress on the borrower’s cash flow.

For businesses, bad debt is a common, yet undeniably unfortunate, cost of doing business—so it helps to take action quickly at the warning signs of default. One of the benefits of being a member of the , for example, is access to information about the payment behaviour of non-bank borrowers or debtors. This proves helpful in credit evaluation and monitoring processes.   

Another advantage for Non-Bank Bureau members is being able to include the Integrated Credit Solution (ICS) logo on their invoice. This serves as an effective pre-emptive measure to encourage customers to prioritise payments to avoid the risk of being included in the negative list. 

Here is a look at some early warning signs that lenders need to be aware of when assessing an entity’s credit health.

Multiple lenders

When a potential customer is found to be applying for credit with multiple lenders, especially within a short period of time, this may be a signal that the borrower is in urgent need of credit.  It is also best to look at it in conjunction with other warning signs that may show that the entity may be taking on too much debt.

Financial information

An entity’s financial information is also worth looking into as this can provide an overview of a company’s standing, as well other indicators that can help you monitor potential risks in your credit portfolio. Financial ratios, such as profit margin, liquidity, total assets turnover, and so on can help businesses make assessments about an entity’s financial situation. It would also help to gain insights about the entity’s other known business interests and even alternative contact information.

Late payments

Does the client frequently pay their invoices after the due date? There may be other reasons, but this also shows that the client may be having difficulty maintaining a good cash flow and is worth checking out. Keep in mind that a sudden change in payment habits may also be an indicator of a bigger problem.  

Litigation history

You may also want to conduct preliminary checks on an applicant’s legal liabilities to determine the level of risk. Does the applicant or existing customer have any outstanding litigations? Bankruptcy filings? It is important to find out whether the entity is involved in any legal suit as this will impact one’s ability to pay on time or at all.

Negative listings

Has the applicant been blacklisted by other lenders or businesses before? If the applicant has been consistently flagged by other lenders, it is an indication of the applicant’s payment behaviour towards creditors, given their financial situation and cash flow.

How to minimise bad debt and improve collections

As they say, prevention is better than cure. Experian, for one, offers solutions to help optimise cash flow and account receivables with preventive measures in the early to mid-stages (pre-delinquency) to the late stage of collections, or what is regarded as bad debt.

These solutions include credit reports that can help lenders gain more insight into the credit risk of potential clients (borrowers) when conducting credit assessments and preliminary checks during onboarding, portfolio management, and reviewing credit terms.

Scores and credit ratings allow businesses and lenders to understand the customer’s creditworthiness by looking at their repayment behaviour. These insights can then help businesses make better decisions and improve the customer experience. One example is increasing the credit and payment terms for customers with good repayment behaviour.

One can also subscribe to “always-on” monitoring alerts to get notified when there are key updates regarding your customers, suppliers, or portfolio, thus enabling you to take action more quickly. Experian’s Litigation Watch, for instance, offers timely advisories when one’s monitored entities are involved in any legal actions, such as filings for bankruptcy, origination summons, and more.  

By and large, quality data is proving to be an indispensable element in credit risk assessments. That is because lenders and other businesses are able to make decisions throughout the entire customer lifecycle:

• Onboarding
• Identifying high-value customers
• Managing cash flows by setting the right credit terms based on customers’ risk profiles
• Avoiding bad debt and improving collections with early warning signs

In today’s context, it is critical to be able to proactively monitor your portfolio and identify the risks early on. Talk to us to understand how Experian has helped our Non-Bank Bureau members optimise their cash flow and reduce costs related to collections and recovery