How to get a clearer view of your credit risk
In an earlier article we discussed the Customer Due Diligence (CDD) check and running a risk analysis to determine whether you should do business with a prospect at all. That is an important part of the business process, certainly when large amounts are at stake and the margin per customer clearly justifies it. But what if it does not?
When you sell services to consumers at an average margin of €100 per customer per year, volume is what matters. Naturally you are only interested in customers of good faith, who at the very least intend to pay on time. But how do you achieve that without running an overly aggressive door policy?
Demonstrated unwillingness
A first step is to identify prospects who have demonstrated that they are unwilling or unable to pay. The Dutch Central Insolvency Register can be used for that; it holds records of bankruptcies, suspensions of payment and personal debt restructuring.
To map the risk further, there are several options that give a verdict based on a credit score. Unlike the Central Insolvency Register these checks are not free, but commercial parties carry them out for a relatively low fee. What you then do with that score is up to you as the provider of the product or service. You might reject the customer outright, but asking for payment in advance or a deposit are options too.
Good CDD processes start with identifying the problem
Getting a grip on credit risk
At CodeCast we have extensive experience connecting business systems to credit information agencies such as EDR and Focum. The information they provide can be useful in several business processes. Do you only want to screen new customers? Or is a periodic check on the existing customer base worthwhile too? We are of course happy to advise on mapping the processes and their possible optimisations.
The longer a customer buys products or services, the more valuable internal information builds up as well. Payment behaviour, for instance: are there trends to be spotted? A customer you have a long-standing relationship with, who always pays on time, suddenly misses a monthly invoice. What is the chance that this customer will miss the next one too? And how likely is it that the account will eventually end up on the defaulters list?
By designing business processes around questions like these and acting proactively, a relationship can sometimes be saved or financial damage prevented. How you do that depends on what you as a business owner are comfortable with. These optimisations do not always have to have a major impact on the business processes. A solution can be as simple as getting in touch in good time and asking how things stand. Perhaps offering a payment arrangement helps? Or perhaps it reveals at an early stage that this customer’s risk profile has changed, and with it the way you do business. Whatever the approach, credit risk becomes a great deal clearer.
Building a humane door policy on data
CDD can serve more than one purpose
With CDD as part of the business processes, several goals come within reach. Most people immediately think of screening prospects and partners up front, or of a door policy. But it is just as possible to use CDD to give employees more information for a more effective approach to customers. Or even to treat customer experience as a goal in itself, by proactively offering a payment arrangement or deferral when payment behaviour breaks with its pattern. Working in a data-driven, process-led way makes the possibilities endless. The CodeCast platform provides everything you need to automate your processes without disruption, whatever the goal.
