Credit Risk Management and Business Information:
What, Why, and How

All businesses seek to maximise profit while minimising financial and credit risks that could jeopardise their hard-won positions. To do so, they need sound and robust business information that can drive their decision-making processes and help them manage credit risk by ensuring that they only do business with partners who are solvent, trustworthy and creditworthy.

To manage and minimise exposure to credit risk, it is important for companies to make the right decisions, on who to work with, to what extent, and what precautions should be in place to mitigate risk. In order to make that decision, it is important for customers to know all they can about the people and the entities that they are working with. Such information can only be obtained through detailed and pertinent data collection over time which is then analysed by experienced practitioners to either yield valuable insights or ring alarms.

How does business information drive credit risk management? And how do you obtain and apply the information obtained during the credit risk management process? In this article, we'll look at how the process is carried out, and how you should use business information to drive it.

What is Credit Risk?

Credit risk refers to the risk that another company may fail to repay credit that has been extended to it, such as by failing to pay for goods or services already provided by you in the case of a customer, or by failing to supply goods and services after having been paid, in the case of a vendor or supplier.

This is a common risk faced by businesses in normal trade, because trade credit (whereby orders are invoiced for payment later, or payment for goods or services is made in advance) is a regular and necessary practice.

However, this is a process that requires trust and always carries a risk of default, as a lot can happen between dispatch of payment or goods, and the receipt of the same. For example, a company can suddenly fold, or be unable to honour its agreements due to cash flow/supply problems, after costs have already been incurred on your end.

Credit risk is also an especially pertinent concern for banks and financial institutions, which offer loans and credit as the core of their business, and which are especially exposed to the risk of defaults and the loss of large sums of money extended as credit.

What is Credit Risk Management?

Given the nature of credit risk, credit risk management refers to the processes implemented by companies to assess, identify, and minimise or eliminate such risks.

This is done both by obtaining and analysing business information and insights about their counterparts and their industries, as well as by formulating internal policies and SOPs to prevent such risks from becoming a part of their business operations.

Credit risk management is a process that begins from before a customer or supplier is onboarded, and continues throughout the business relationship through constant reviews and monitoring.

The Process of Credit Risk Management

Using the 5 C's to Gauge Creditworthiness

The key objective of a credit risk management review process is to ensure that a business counterpart is basically creditworthy at the point of review, that is, that it is capable of paying or supplying what has been contractually agreed. The need for different kinds of business information permeates this process at every step of the way, be it information about the company, its finances, or its persons.

Each company has its own credit risk management processes and policies in place. However, whether done as part of the onboarding process or as part of a regular review, most of these processes will invariably draw on the 5 C's of Creditworthiness as a basic framework for assessment.

The 5 C's are:

• Character

  This refers to the credit history of the company being assessed--basically, how punctually they repay any loans and credit extended to them. This is fundamental to the trust required for the extension of credit. A character check may also include the credit histories of business owners and other key personnel or stakeholders if they are involved in the company's loans.

• Capacity

  This refers to the capacity of the company being assessed, to take on more loans and credit, and whether they have the capability to repay any credit extended by your company. Credit capacity is assessed through a review of the company's existing loans and liabilities, as well as its current financial position with regards to revenue and profit. The reports thus obtained would enable you to assess whether a counterpart has overextended itself with debt, which would be a risk even if the company has a good history of repayment.

• Capital

  This refers to verifying and taking stock of a company's paid-up capital and the assets it owns, in order to paint a more complete picture of its capacity and financial position.

• Collateral

  After receiving reports about the capital and assets of the company under review, a credit risk management procedure would often also look at what a company might have available to use as collateral, to provide security for any credit extended, in case the risk level is high enough to warrant it.

• Conditions

  In addition to obtaining and analysing business information and insights about the company itself, a thorough credit risk management process would also consider the market conditions that provide the industrial context for the potential or current business relationship.

Besides such macroeconomic factors, other considerations, such as the amount and purpose of a loan or credit, may also require clarification as part of the conditions under which credit is being extended. This may not only require a credit risk assessment, but also the application of Know Your Customer (KYC) and anti-money laundering (AML) checks and processes to provide further clarity about your counterpart's risk level.

Obtaining Business Information to Fuel the 5 C's Evaluation

Throughout the entire credit risk management evaluation process, business information is crucial. It is the foundation without which no assessments and decisions can be accurately made.

In Singapore, this information is gathered and synthesised by specialist business information providers, which are registered with official business registries and authoritative sources such as ACRA, credit bureaus worldwide, and other relevant organisations, and which can not only provide raw data but customise it into optimised reports for a client's specific needs and purposes. Business information obtained for credit risk evaluations usually include items such as:

• Company credit reports and bank reports
• Company Bizfile financial statements filed with ACRA
• Company registration information
• Key personnel profile and credit information
• Evidence of reputation from news and records

Such information is obtained through tools such as company searches, Bizfile searches, people profile searches, and international credit searches, and is used to provide a clearer picture of a company's position and operations.

Deciding How Much Credit to Extend

Following the evaluation of all available business information, a decision will be made about the counterpart's credit risk level. Whether through a scoring system or otherwise, your company will be making a decision whether or not to extend trade credit to this customer or supplier, and if yes, how much.

Monitoring and Periodic Review

Ideally, companies should continue to monitor and review their customers and suppliers' credit risk levels throughout the business relationship, collecting information and conducting reviews either periodically, or when they notice that the client's status or profile info has changed. In the latter case, such changes are most often flagged through automation and the use of technology.

How Technology Empowers Credit Risk Management

Companies depend on reliable, accurate business data to drive their credit risk management processes. However, the traditional human-driven and paper-based process is repetitive, inefficient and prone to friction, error and tampering

Spearheaded in Singapore by CRIF BizInsights, the use of technology such as custom APIs, AI, blockchain and fintech can digitise, enhance and automate the credit risk management process and eliminate the inaccuracies of a hardcopy-based methodology.

These are some of the advantages that can accrue to companies who adopt technological solutions for their business information collection and verification:

Improves Accuracy and Speed of Information Collection

Firstly, the use of technology permits simultaneous and much faster collection of information from multiple sources. Beyond merely faster collection of raw data, technology also permits faster processing of that data by filtering and extracting the exact data points your company may need for its purposes, and presenting the pertinent information in easy-to-understand formats for faster analysis and decision making.

Bridges Gaps Caused by COVID-19 Disruptions

With the widespread disruptions caused by COVID-19, it has become ever more difficult for companies to carry out the traditional forms of business information collection, through hardcopies and physical visits and verification.

With that, credit risks for overseas counterparts have grown, and the need for faster, more accurate, more automated and more intelligent digital business information searches for credit risk management has grown greatly in recent times, so that companies can continue to provide a robust level of credit risk mitigation.

Automates Monitoring and Review

Beyond efficiency, the use of technology can also strongly improve business relationships through the elimination of hassle and friction during the periodic review process.

A credit risk review process typically generates a large amount of paperwork and repetitive hassle for partners, suppliers and vendors, as well as the company itself. Human errors, inefficiency and inaccurate or incomplete documentation can lead to further friction and delays in the process which can adversely affect business relationships in the long run.

The use of technology such as APIs to manage the submission and flow of business information can speed up and automate the process by going straight to official sources for data, without needing constant human input.

At the same time, technology can also make credit risk reviews more robust as it can also be set up to automatically detect any changes in a company's information, including flagging major issues for review, or even initiating one automatically.

The Importance of Good Business Data for Credit Risk Management

Credit risk management is essential for the financial stability of every company, but it can only be done well through the procurement and analysis of fresh, fast, accurate and easily understood business information.

You need a robust system that provides for your business data needs, in order to strengthen your credit risk management procedures. With CRIF BizInsights, you can have greater peace of mind.