introduce
The credit manager and business team in the risk control department analyze the customer's financial situation and determine the best credit limit for the customer. In traditional credit history, it takes a lot of time and effort for bank staff to manually analyze customer credit. Your team can spend hours performing day-to-day activities, including engaging customers, gathering financial data, calculating credit scores, and conducting regular reviews. With a heavy reliance on manual methods to complete the process, your risk team has little time to focus on strategic, high-value tasks.
More than 90% of companies have better needs for risk prevention credit management strategies. Selling goods and services on credit can help you expand your customer base and strengthen customer relationships. However, there are many gray areas in traditional credit management, which consumes a lot of time and energy from the team.
Today discusses the key challenges credit teams face when using legacy systems. We also look at modern credit management methods to reduce bad debts and delinquent accounts.
9 key questions and answers for effective credit risk management
01. What are the key components of credit risk management?
The credit team is the first line of defense against corporate financial risks. A sound credit strategy can anticipate potential business risks and help identify prospects or customers who may default.
For mid-sized companies, credit risk management is a very important aspect in limiting the negative impact on their profits. Your credit policy must focus on attracting customers, using the best credit scoring models, standardizing workflows, and regularly assessing your customers’ financial health.
Let’s look at the key components of a strong credit risk management strategy.
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Simplify the customer onboarding process
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Efficient big data credit data integration (credit agency information, public financial statements, bank and trade references, financial stress prediction)
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Best-in-class credit scoring model
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Standardized approval process (between internal departments and customers)
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regular credit review
02. How to attract customers faster?
The onboarding process is a key touchpoint for customers with your organization, where first impressions are often formed. The entire process should be smooth and fast for a better customer experience.
But in most mid-sized businesses, the customer onboarding process is manual and cumbersome. The entire process is also slow and error-prone. Complex workflows that require data or approvals from multiple teams further extend the time it takes to attract customers.
Online credit application forms can help replace paper-intensive processes with an electronic experience and attract customers quickly. With an online credit application form, customers can fill out their financial information without missing any important details. Electronic workflows enable automated approvals (as long as required criteria are met) to support faster onboarding. Automating credit application and approval workflows can also improve customer experience.
At present, many domestic licensed consumer finance companies have automated approval processes, and small and medium-sized banks are also following suit and building their own automated risk control approval systems.
03. What are the required fields in the credit application form?
The credit application form plays an important role in the onboarding process. Most credit applications are paper-based and require customers to fill out many fields. This makes the process tedious and customers often submit incomplete or inaccurate forms.
Make sure your customer credit application is not too long but still contains all relevant information. Here are some important fields to include in your online credit application form:
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business type
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Credit extension required
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Applicant's certificate
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Applicant authorization
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terms and Conditions
04.What are the main sources of information for credit risk assessment?
In addition to the information provided on the credit application, you should also research the customer's financial background using data provided by third-party credit agencies.
Credit rating agencies and institutions can help you predict your clients' current and future financial health. The following is a list of verified foreign sources of credit information used for risk assessment:
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Equifax
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FICO
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D&B
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Experian
Domestic credit score reference indicators include PBOC central bank credit score, Ant Financial’s Zhima Credit Score, Bairong’s credit score, and Tongdun Score. There are many domestic third-party data source companies, so I won’t list them all.
Third-party credit bureaus provide the latest, true, and accurate corporate information. However, you have to pay a hefty inquiry fee to aggregate credit information from different sources.
05. How to build a complete credit scoring model?
Many credit teams use the same scoring model for all their accounts. This one-size-fits-all model is an inefficient way to calculate your credit score.
Your customer base will vary in many ways, including industry, type, geography and required compliance measures. You need flexible scoring models to get accurate scores for each customer. Your model must use real-time data from reliable sources to ensure you are tracking all high-risk accounts.
Sales executives often heavily influence credit review and customer onboarding decisions based on their perception of the customer. This results in high-risk clients often being allowed inappropriate restrictions.
Credit decisions made without data-driven verification of customer creditworthiness can result in higher bad debts.
Creditworthiness or credit score is calculated using the following factors:
Financial institutions should build customer segmentation models as much as possible to improve model performance.
6. What are the main factors considered in credit scoring?
If you want to manage credit effectively, you must understand the following parameters for effective risk management and decision-making:
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Delinquency Score: This score provides insight into the likelihood that a business will be late on a payment or have payment problems in the future.
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Paydex Score: This score is assigned by Dun & Bradstreet based on a company's past payments performance and categorizes companies into different risk groups on a scale of 1 to 100.
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Average days past due: This is an important credit term that describes the average number of days it takes for a business to be late on paying its bills.
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Forecast Score: This score takes into account 12 months of historical trade data to predict severe delinquencies over the next six months.
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Stress Score: Formerly known as the Financial Stress Score, this is a dynamic risk indicator that predicts the likelihood of a business going bankrupt within the next 12 months.
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Years in Business: A company's ability to make timely payments depends in part on its size and years in business. Businesses that have been around longer are considered more trustworthy.
These parameters help you formulate better credit policies and provide a 360-degree view of associated risks and opportunities.
07. Why are regular credit reviews important to stay on top of high-risk customer accounts?
Continuous monitoring of a client's financial health is critical to staying on top of high-risk client accounts. This can be done through regular credit risk reviews. Periodic review refers to updating credit data and scores at specific intervals to improve the accuracy of credit risk. Parameters tracked include payment behavior, deduction type, order size and seasonality, among others.
Any changes in these factors can affect a customer's credit score and credit limit. Therefore, regular reviews can help you keep an eye on your customers' financial health, update credit terms, and monitor the likelihood of delinquency.
08. How can standardized credit management workflow help speed approval?
Many mid-sized businesses lack proper credit approval and letter delivery workflows. A lack of standardized workflows can lead to miscommunication, which can lead to poor credit decisions. Incomplete data on the credit application form and the time it takes for the credit to be approved by senior management can cause delays throughout the process.
09. How to improve communication with customers?
You need to inform your customers about credit acceptance, credit rejection, and any other data required. Many mid-sized businesses rely on paper-based communication techniques, such as letters by post, to convey this type of information. This is time consuming, inefficient and expensive.
Electronic channels (email and notifications and alerts on apps) help make the communication process smooth. Ready-to-use templates save your team time drafting letters. Sending letters via email can help save costs.
way forward
The credit team is the overseer of the organization's bottom line; their work never stops. Establishing a standardized credit risk management system is a critical step in enhancing cash circulation. Your credit team must constantly assess the risks associated with existing customers to eliminate any possibility of delinquency.
But over the decades, significant advances have been made in the process using automated software. Best-in-class solutions help mid-sized companies acquire customers faster, standardize credit scoring, automate credit workflows and improve correspondence management.
Excellent automated scorecard models and strategies make your credit risk management process efficient and effective.
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