Listen to small business to mitigate trading credit risk
There is no crystal ball in credit, and we all know how useful one would have been at the start of 2020.
But, I’ve always said, CreditorWatch has the next best thing: trade payment data. It’s fast, functional and incredibly effective in predicting future default. Utilising payment data is a must for effective corporate credit risk management and small business lending.
James O’Donnell, Managing Director at Open Analytics, is a keen advocate of trade payment data.
“Business-to-business transactional data is a vast and largely untapped resource for credit managers.
Working with a range of creditors from the ‘Big Four’ banks to fin techs, we have shown our clients that delayed invoice payments and reductions in business to business transaction volumes are among the most predictive early warning indicators for credit risk and should be a foundation of any modern creditor’s underwriting and risk management framework.”
This is especially pertinent during COVID-19 when it’s even more difficult to assess risk.
“Business-to-business transactional data has become even more critical to credit managers in the COVID-impacted economy as more traditional risk indicators such as bank arrears and insolvencies are masked by government and banking sector policy interventions,” says James.
“In this environment, trade payment arrears is one of the last tools in a credit manager’s armoury to identify distress and respond accordingly.”
What small business can reveal about your customers
The smallest businesses in Australia are also some of the most powerful: here’s why.
Small businesses make up 98% of Australia’s workforce, but are often deemed non-critical suppliers and are the last to get paid when times get tough. When a business stops paying its smaller suppliers, it’s an early warning sign the debtor is in financial distress. Late payments and non-compliant debtors create a snowball effect: if you’re not paying attention, they have the potential to bury you too.
CreditorWatch offers over 50,000 Australian businesses SME trade payment data that can’t be found at any other commercial credit bureau. In fact, we have over 9 million lines of trade contributed on a monthly basis.
We’re the only credit bureau to offer this accounting integration. It imports valuable invoicing information, bank statements and Days Sales Outstanding (DSO) data into CreditorWatch and is refreshed every five minutes before feeding into our credit reports.
This is how you can get a real-time look into how businesses are paying some of their smallest suppliers. Knowing these insights is the key to staying ahead of lending or trading credit risk along with protecting your cash flow.
Perform a credit risk assessment with CreditorWatch
The proactiveness of SMEs to call out slow debtors is a benefit to all businesses in the CreditorWatch community. Once a business has been strung along by a slow-paying debtor that refuses to pay, they register a payment default. This is yet another early alarm bell to listen out for and the second sign a business is on the road to insolvency. According to CreditorWatch data:
- On average, smaller creditors lodge defaults up to six months prior to a larger creditor
- Over 50% of businesses that incur a payment default will go into administration within 18 months
Whether these businesses are just poor payers or riddled in debt, it pays to notice – literally. Payment default data and trade payment information expose high-risk businesses in a CreditorWatch credit report.
With the Payment Rating score, you can track a business’ payment habits over the last 12 months and identify any potentially concerning patterns. Compare this payment behaviour to the rest of the industry and assess whether this business pays later than the industry average.
Some industries are serial late payers, like Transport, Postal and Warehousing. Unfortunately, no industry is immune to cash flow issues, especially in the middle of a pandemic, and I expect payment times to continue to blow out.
However, as we constantly source new data, outcomes can change; such is the fluidity of the market. You can keep tabs on how your industry is faring and identify the latest market trends in our monthly Small Business Risk Review released on our blog.
My tips for Australian businesses
Trade payment data offers an accurate snapshot into the viability of a business, and this empowers you to make the right decisions for yours. I always recommend my clients proactively avoid bad debt by preparing for the unexpected.
You can do this by:
- Ensuring your credit policy clearly dictates your terms and the repercussions if they’re not met
- Reducing credit to a customer that’s shown risky payment behaviour
- Monitoring your customers for risk indicators such as defaults and court actions that may indicate their reduced ability to pay
- Taking note of small defaults – the statistics show they are a serious threat
- Assessing all entities associated with a director by looking at cross directorships
- Identifying unknown risks with a UBO report
Don’t hesitate to reach out to me for a conversation on our innovative tools and data sources. I work with some of Australia’s biggest businesses to reduce their trading credit risk, and I’d love the opportunity to work with yours.
Gordon’s enjoyed more than five years working at CreditorWatch from the Melbourne office. He progressed from his role as Senior Business Development Manager to Major Accounts Director in October 2019.
In his role, Gordon helps banking and finance institutions and businesses in the telecommunication and insurance industries with more complex credit risk issues and showcases CreditorWatch’s unique data sets as a solution. He’s particularly passionate about dealing with people from all walks of life to help reduce their exposure to credit risk.
Prior to CreditorWatch, Gordon’s career included almost 20 years as a National Sales Manager at an automotive parts company. He’s also a keen traveller and family man who loves nothing more than exploring Australia in his caravan. Connect with Gordon on Linkedin or reach out via the details below.
- Email: Gordon.firstname.lastname@example.org
- Phone: 0419 349 585