Breaking finance and business news, tax information, jobs and more for finance directors and senior finance professionals.

In today’s market-place decisions are demanded in an instant. As consumers, we expect that when we apply for credit we will be provided with an immediate decision as to whether our application has been accepted. This demand is now increasingly commonplace in the commercial arena where the time available to make decisions over whether to lend to a business, extend credit, goods or services, is getting shorter all the time. Businesses are increasingly faced with having to deliver immediate decisions or run the risk of customers, both new and existing, going elsewhere.

Understanding customers
Businesses have an uphill struggle to accurately assess the risk of trading with other businesses, particularly small, newly formed and non-limited businesses. For a start, are they sure they know who they are? With the increase in commercial fraud, businesses need to be on their guard to ensure that they don’t extend credit to a company that has been fraudulently set up or one that doesn’t even exist. At the same time, they cannot afford to be complacent when dealing with their existing customers either. Having established a customer is creditworthy at the onset of the business relationship, it does not follow that its status will remain the same. In fact, over half of all bad debts arise from longstanding rather than new customers.

These challenges, coupled with an increasing demand for speed, illustrate the importance of regularly re-evaluating credit management techniques as part of the risk management process.

Effective risk management
A wide range of information and credit management tools are available to businesses to aid the credit management process and ensure that businesses know exactly who they are doing business with or intend to do business with, before any goods or services are committed. Credit checks can be done easily and instant reports are available over the Internet. There is easy access to statistically reliable recommended credit limits and credit ratings to help reach decisions on whether or not to grant credit to a customer, how much and under what terms.

Different levels of reports are available providing information on financials, payment history, comparative industry data, public record information, characteristics of the company itself, such as the number of years it has been in business, the number of employees, the industry sector(s) in which it operates, sales volumes, trends and seasonality. This information enables businesses to build up a clear picture of a prospective customer’s financial stability and be forewarned if existing clients are experiencing difficulties, such as a worsening payment record caused by cashflow difficulties.

Advances in credit scoring
The problem of assessing risk is particularly acute with smaller sums of £50,000 and below, which make up the vast majority of commercial lending and trading. These sums tend to apply to smaller companies, which carry greater risks than large, long-established companies. In the past, this was compounded by over-reliance on historical financial information that is constantly eroded by raising thresholds for audits and filing requirements.

As a result, commercial credit scoring for predicting company stability and potential stability has, of necessity, developed to utilise additional information to generate new and more accurate credit scores. Despite this, some traditional and generic scorecards still rely solely on inherently out-of-date financial information, making it difficult to assess companies’ current financial status and creditworthiness with any degree of accuracy. This is particularly acute when dealing with new companies or companies that have yet to file their first set of accounts where no historical information exists.

Recent advances have helped to minimise these issues. Learning much from its consumer credit counterparts, commercial scoring technology has really come into its own. Today, commercial scoring technology is able to assign risk to small businesses, and even newly incorporated businesses and businesses without accounts, and is providing a more accurate way of identifying the risk of trading with, or lending to, other UK businesses.

Crucial to this has been the combined use of consumer and business data, which help companies to set accept and decline points for business at a level of risk which they can afford, and control their business or outlets more efficiently. To advance these predictive risk indexes, credit reference agencies have broadened their information bases and introduced additional sources of information to build scorecards that are capable of assessing different types and sizes of businesses, and able to predict the likelihood of financial difficulty within the next 6–12 months.

Given the nature of many small businesses, and in order to accurately assess risk, new scoring technology does, in effect, treat them as large consumers. Cross-referencing consumer and business information gives a valuable insight into the business interests and track records of the people who run companies. For smaller and newly formed companies, where financial data is scarce, this combined data is often the best indicator of the business’s likely commercial integrity and future prospects for expansion. It also highlights any signals for overtrading, non-payment risk and even failure. However, it is worth noting that this approach is still unique to Experian.

Alongside this, the power of new scoring technology and its predictiveness has eased the onset of automation in commercial credit environments. Advanced scoring is now an integral part of fully automated credit application, processing systems delivering credit decisions in an instant. These advances are radically changing commercial credit management practices.

Is automated credit scoring better than manual decisions?
However, and despite these advances, some credit managers and businesses still question the validity of automated credit scoring systems in a commercial environment. Here, manual decision-making is still the order of the day, gut feeling over technology or in an ever-increasing competitive market, win the order then worry about the rest later. However, automated credit scoring should not be seen as a replacement for the personal touch. It is something that can work in tandem to deliver real business benefits.

Automated credit scoring is not just about preventing risks, such as stopping unstable businesses from being accepted as customers, it is also about doing more business, faster and better. Its accuracy and speed of decision-making enables new business to be accepted faster and with greater confidence, allowing obvious accepts to pass straight through – boosting productivity and efficiency, while reducing costs. Consistency of decision-making is assured and valuable expertise can be focused on more complex cases, eliminating the need to waste valuable staff resources on manually processing simple, low-risk decisions and administration tasks.

Thanks to these advances, automated commercial scoring is now making a huge difference by providing a more accurate way of identifying the risk of trading with or lending to, other businesses. This message is now getting through, and today even the smallest business can access effective credit and risk management tools to enable them to make accurate and consistent decisions, faster and more profitable.