The relationship we have with risk is a fascinating one; how we calculate it and how we respond to it when it presents itself can tell us a lot about our own psychology. For instance, we habitually overestimate the risk of rare, catastrophic events, like earthquakes. Yet we underestimate the risk posed by commonplace events, like getting behind the wheel of a car when we haven’t had enough sleep.
There are some tendencies like these that we all share, and each of us also brings our own unique set of biases and blindspots to the mix. In short, risk analysis is not something we’re all that good at. But that doesn’t mean we are destined for failure. The best business continuity and risk management plans are designed to compensate for our natural shortcomings and reduce human error. One way of doing this is to enforce a blanket policy to check business credit scores before offering a line of credit.
In this article, we will outline five ways that running a mandatory credit check for company accounts can help your business minimise financial risk and make decisions with clarity and confidence.
1. Understand their credit history and credit risk
We tend to think of all risk as inherently bad, but it is actually a driving force behind every market and an essential tool for business strategists. We don’t need to explain that there is a direct, positive correlation between the amount of risk and the potential for loss. However, it is important to realise that risk is a double-edged sword, and that the same positive correlation exists between risk and return.
When you lend money to a business that is considered high risk, you could potentially end up losing a lot of money. You also stand to make a far greater return on your investment than if you extended credit to a business whose credit report came back spotless. The key to navigating these decisions is to have the most reliable information so that you fully understand the risk you are taking. CreditorWatch offers exhaustive business credit reports and uses RiskScore, with its advanced, AI-powered automation to generate business credit scores with a high degree of accuracy.
2. Understand their payment history
One of the best predictors of a company’s future behaviour is its past behaviour, and for that you need to look at its payment history. Our Payment Rating feature scans data from the integrated accounting systems of small to medium businesses and the Aged Trial Balance (ATB) of large corporations to measure how quickly a company pays its bills. This alerts you to potential high-risk customers so you can adjust your payment terms and limit lending.
3. Know their payment behaviour and likelihood of default
Our systems predict the likelihood of a debtor defaulting on their payments, so you know what the risks are. DebtorLogic analyses your ATB to identify payment trends and deteriorating payment behaviour. It presents the information in clear, easy-to-read charts and graphs, so you can see at a glance how your debtors are tracking.
4. Identify high risk entities and slow paying businesses
When we create a credit report for a business entity, we draw on an extensive pool of data collected from our 50,000+ customers – which includes small-to-medium businesses and large corporations right across Australia.
It also uses the traditional sources such as ATO, ASIC and court data, alerting you to high-risk indicators such as payment defaults, bankruptcies, and debt collection notices. By comparing and analysing information from these diverse sources, we are able to pick up inconsistencies and suspicious behaviour that could tip you off to potential defaults down the line.
5. Use this information to make informed, data-driven credit decisions
Once you have all the information in front of you, you are in the best position to make important decisions like who to extend credit to, what kind of payment terms to set, and what measures you should take to get ahead of high-risk customers and avoid bad debt. This way, you know when and where to direct your resources, making the process of credit monitoring and debt collection more efficient.
To learn more about the ways you can use a company credit report and business credit scores to safeguard your business, get in touch today.
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