Credit Risk Onboarding Risk Management
5 mins read

How fintech companies can manage credit risk

At the apex of technology, research, and financial markets – fintech companies are breaking new ground and changing the ways that clients operate. The impacts of smart product offerings, leveraging the latest developments in science and engineering, have been enormous for both individual consumers, and partner businesses. Be mindful, though, that with every ambitious venture that embraces your latest product, there is potential for accompanying credit risk. There are steps that must be taken to protect your cash flow.  

Credit risk challenges for fintechs 

Fintech companies are the product-development trailblazers of the corporate world. The breadth of businesses within the sector encompasses digital lenders, crypto and blockchain companies, international money transfers, robo-advising and online stock trading – just to name a few. Essentially any business leveraging technology to transform the delivery and execution of financial tasks, for either individuals or corporations, falls within this umbrella. The prospective clients of such a business are endless: businesses across all sectors and stages of growth, or individuals of widely disparate levels of personal wealth.  

Perhaps surprisingly, a considerable factor in the credit risk exposure for your fintech business is an abundantly enthusiastic client market, trying to overplay a hot-hand. While every contemporary customer wants to leverage the latest tech as quickly as possible to make profits surge, a number of them have eyes that are bigger than their stomach. They may overcommit on front-end costs, hoping that the implementation of your tech will bring in the future cash flow, or cost reduction, to retroactively pay for its own costs. This is a huge gamble for all parties. 

If these revenue uptick projections don’t eventuate, a client’s insolvency might quickly result in your own. Within the variability of trading conditions, avoiding default currently is no ‘sure thing’ within any industry. International tradewinds, government regulations, interest rate hikes – manifold external factors can detrimentally affect the flow of cash for clients, through no action of their own. This is especially true for start-ups and entrepreneurs. Even if the market remains steady for a time, these businesses must attempt to be vigilant in scaling efficiently. There must be rainy-day contingencies, but there are simply too many young businesses that have played a naively optimistic game – expecting the profits to continue rolling. 

As the cost of doing business increases, the growing threat to your fintech company is that broad cross-sections of your client base may not have the margins to avoid late invoice payment or default. As noted in the July edition of the Business Risk Review, by Creditor Watch, external administrations across the board have increased month-on-month by almost 17%. There must be no complacency. Even if a client has been performing well in previously favourable conditions, there is simply no guarantee you’ll avoid bad debt. Sales growth rates and demand have been slowing, and you must protect your cash flow now.  

How fintechs can mitigate credit risk 

There are proactive credit risk management actions that are worth considering taking. As global and domestic market tradewinds change, it is imperative that fintech businesses get on the front foot. You are simply too broadly exposed to industries, trading conditions and factors that are beyond your ability to control. The suite of tools available for CreditorWatch creates the clarity to accurately identify which clients present a greater credit risk to your operation. 

Assess Creditworthiness Take the guesswork out of determining risk exposure, especially as your customer base grows and diversifies. The market-leading Credit Reporting platform, from CreditorWatch, allows you to clearly assess the creditworthiness of customers through the use of data-driven analysis, delivered intuitively. 

Fundamental to this base layer of cash flow protection is RiskScore, which utilises three categories of extensive data. This includes over 11 million monthly trade lines from 55,000+ customers, business demographic risk data (encompassing factors such as business maturity), and traditional credit risk drivers such as ATO tax defaults.  

Each client business can be searched individually, according to their ABN or ACN, and allocated a RiskScore between 0-850, according to sophisticated machine-learning. The higher the score, the lower-risk the entity. Further, the platform will also provide further insight through the assessment of default risk – from A1 to F. This information empowers the decision making of your fintech business, allowing for a clear assessment of credit risk regardless of the cross-section of industries that you service.  

Streamline Onboarding With fintech products being so flexible in their usage across different businesses, and potential client volumes being so high, you need to ensure that the onboarding process is time-efficient and secure. CreditorWatch allows for this peace of mind through the integration of the smart, one-click, online onboarding tool: ApplyEasy. Paperless onboarding processes, and credit applications, are the way of the future – allowing for the automation of decision-making, ease of management for the approval process, and removal of illegible handwriting.  

Manage Debtors ProactivelyAny existing creditors, or those coming onboard, can be best managed through our interactive trade program: DebtorLogic. Through the analysis of your entire Aged-Trial Balance, you may accurately predict which creditors are at risk of default or late-payment ahead of time, allowing you time to get out in front of the potential bad debt exposure. The program further empowers you by prioritising and standardising the collections process. That cash flow from outstanding invoices is necessary for your operations, and this tool allows for the expedition of payments – reducing the days-sales-outstanding and mitigating the credit risks.  

Clean Up Your DataAs a fintech provider, you already understand the importance of clean and secure data to the decision-making process. If customer data is either inaccurate, incomplete or out-of-date then your capacity to make well-informed choices goes out the window. The challenge of cleaning up a database can appear overwhelming, but it doesn’t have to be. A Portfolio Health Check, by CreditorWatch, makes this necessary evil a breeze. It’s a four-stage process – data matching, validation, reconstruction and standardisation – that leaves your database accurate, accessible and immaculate. Once the data is clean, you can rest assured that your information is reliable.  

Deep-dive High Value Clients – As the value of an individual trading relationship grows, so too can the cash flow dependency on that particular client. You need to be sure that they are dependable for payment, and built for longevity as a business. A full Financial Risk Assessment, from CreditorWatch, provides this vital information in plain terms by exploring their operations more intimately. Accompanied by professional analysis from a qualified Chartered Accountant (CA) or Certified Professional Accountant (CPA), it analyses two to three years of company financials (including income statements, cashflow and balance sheets. This delivers that additional risk-mitigation that a high-value relationship deserves.  

For fintech companies, if your cash flow is protected then your growth potential is extraordinary. With the CreditorWatch suite, you’ll be protecting your business against the significant risks of bad debt and adverse trading partners. Speak to our team today to get started 

Sarah Ward
Business Development Specialist | Credit management and Collections
Sarah is a highly experienced business risk, credit management, collections and business development specialist with over 10 years of experience. She is an expert in identifying and mitigating risks and has helped numerous businesses gain a deep understanding of the latest trends in credit management. Sarah’s recent work includes writing about high-risk businesses and how to identify them and providing insights on using a risk assessment tool like CreditorWatch’s RiskScore to make informed decisions. She also emphasises the importance of performing due diligence on new clients to assess their credit risk and mitigate cash flow risk. Additionally, Sarah has also written about cash control and how to improve debtor management. Sarah’s recent work includes writing about high-risk businesses and how to identify them and providing insights on using a risk assessment tool like CreditorWatch’s RiskScore to make informed decisions. She also emphasises the importance of performing due diligence on new clients to assess their credit risk and mitigate cash flow risk. Additionally, Sarah has written about cash control and how to improve debtor management.
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