Feb 2021 | Credit Decisions

Signs of stress are emerging

Emergency loans have triggered a swell in demand for commercial credit, which has been extended to more than 1.5 million businesses (via the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS), and the Bounceback Loan Scheme (BBLS)).

In November 2020 the Chancellor extended these loans to April 2021, and enabled lenders to provide top-ups to those businesses who’d borrowed less than the £50,000 maximum first time round.

But a relaxation of credit affordability checks on BBLS applications – which account for the majority of emergency loans – has ushered in businesses with higher risk profiles, and some fraudulent applications. This latent risk within portfolios is difficult to see but there are already signs of stress emerging, pointing to a surge in delinquency as forbearance measures come to an end and loans have to be repaid.

This brings with it a need to redefine collections and debt management strategies, as well as credit strategies that help nurture business borrowers back to growth. And reinforces the need to know whom you’re talking to.

Identifying critical signs of business stress as they occur

You may already be using a range of different predictive scores to help understand the credit risk profile of your business customers. These scores have been built over time during normal economic conditions; however, when it comes to unprecedented periods of volatility such as those we’re now experiencing, there is a real need to be able to use both short term and long term stress indicators to assess commercial credit viability. Monitoring key indicators at a high frequency to provide early signs of stress is critical to enable prompt interventions to be made.

Experian’s newly created Commercial Volatility Index (CVI) is built specifically to identify signs of stress from Covid-19.  We have taken a view of the whole UK commercial market and assessed the availability of cash flow and working capital available to businesses. As well as looking broadly across the credit agreements businesses have in place, we have factored in the macroeconomic outlook for the sectors within which those small businesses sit. This combination of incredibly insightful and accurate data means that the CVI enables you to track changes in the volatility of small businesses, on a month-by-month basis.

Understanding and anticipating your portfolios loss risk

Lots of businesses accessed credit for the first time during 2020. And some key sectors have increased their credit by 50% or more, in particular Arts, Entertainment and Recreation, Accommodation and Food Services, and Construction. The three drivers of credit we’re seeing broadly fall into three areas:

  • Those who need the funds to survive
  • Those who are using the funds to boost their productivity, and therefore their resilience
  • Those taking advantage of cheap credit for non-business needs

An increase in non-limited businesses seeking credit from the outset of the pandemic is indicative of the businesses needing credit to survive. Typically, these companies don’t need credit, suggesting they’re looking for alternative funds to stay afloat.

Understanding your portfolio at a granular level is key to be able to anticipate your loss risk and execute the right problem debt management strategy. Our Problem Debt Management solutions allow you to identify and manage your pre-delinquency customers through data-driven decisions and intelligent insights.

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Readying data-driven collection processes for the surge

The Chancellor’s extensions to the loan schemes and the option for lenders to ‘top up’ small businesses’ loans if they’ve borrowed less than the maximum amount mean more businesses borrowing more money. While additional flexibility in repayments of Bounceback Loans through Pay as You Grow effectively extends the term from six years to ten. This is risk that won’t manifest itself until repayments start to become due, but it represents a genuine shift of risk in credit provider’s portfolios and should be catered for accordingly.

So how can you ready your processes for the surge to ensure resource isn’t overwhelmed, your customer experience is positive, and processes are effective?

We believe the answer lies in the right data, insight and tools. Having a 360-degree view of your commercial customer base is key to gaining a holistic view of risk and opportunity. This allows you to put in place the right strategies to effectively manage the process from pre-collections to recovery.

Linking businesses to owners to verify and authenticate them will also allow you to detect potential fraudulent businesses.

How Experian can help

We can help you to:

  • Identify critical signs of business stress as they occur
  • Take early action to apply the most effective treatment
  • Create a holistic view of your entire customer portfolio to understand and anticipate your portfolios loss risk

We’re also able to operationalise the data through our software solutions to enable automation of processes. To find out more please contact us.