In the world of B2B credit lending, effective credit risk analysis is crucial for a business’s financial health. Traditional credit risk modeling typically relies on extensive data analysis, including credit scores, financial statements and historical payment records.
Unfortunately, some businesses have less established financial footprints than others, especially those of larger companies. In these instances, limited data is available to credit managers, making the credit risk analysis process much more challenging.
When faced with this dilemma, here are the top 5 things you can do to ensure you’re making the most informed credit risk decisions.
5 Credit Risk Analysis Tips to Follow When Faced with Limited Data
Some borrowers have less practical experience and established history than others, and although this can make judging their creditworthiness a more complex task, it does not mean they are unreliable or inconsistent in their business dealings.
When dealing with incomplete or insufficient data from an applicant, you should:
- Understand your borrower: Engage in meaningful conversations with the applicant to gather as much information as possible. Understand their goals and the state of their business as compared to previous periods, the state of their industry and competitive environment, and how they plan to make payments. This qualitative assessment can provide valuable insights that complement your limited quantitative analysis.
- Analyze cash flow: When traditional financial statements are unavailable or insufficient, carefully analyzing a borrower’s historical purchasing trends, financial forecasts and current accessible funds is required. Requesting bank references to perform in-depth cash flow analysis allows you to more accurately assess the borrower’s ability to generate sufficient income to cover expenses and debt obligations. Requesting bank statements or transaction records to evaluate income sources, regular expenses and the stability of capital, as well as thoroughly researching the industry, trends, business model and forecasts of the company, are necessary steps to building an actionable borrower profile.
- Consider collateral and guarantees: In cases where there is a lack of historical data, emphasizing collateral or guarantees can help mitigate credit risk. Analyze the value and quality of the assets being offered as collateral and evaluate the borrower’s commitment through personal or third-party guarantees. This additional layer of security can reduce the risk associated with limited information. Furthermore, UCC filing can help mitigate the risk involved by protecting your company in the event of a borrower defaulting.
- Leverage alternative data sources: While traditional credit data might be scarce, you can be creative and find many additional data sources to assess creditworthiness. These sources may include utility bill payments, rental payment histories and online transaction data, among others. Analyzing these out-of-the-box sources can help identify patterns and behaviors that indicate financial responsibility and stability.
- Utilize credit scoring models: Credit scoring models can provide a standardized framework for credit risk assessment, even with limited information. Develop or adopt credit scoring models that incorporate available data points and assign scores based on their relative importance. These models help streamline the evaluation process and provide reliable results—and automating your decision models will accelerate the process even further while simultaneously guaranteeing more accurate, consistent results.
Access to insufficient data can make even the most experienced credit manager hesitate when reviewing an applicant. By following the steps laid out above, the risks involved in approving credit to these companies can be managed and better understood.
A Powerful Alternative
Another way to process applications with limited data without exposing your company to unnecessary levels of risk and speculative reasoning is to implement a data analysis platform into your workflow.
At Bectran, we help you consolidate the data you require to make confident credit and risk assessments. Schedule a free 30-minute demo to learn more about how Bectran helps you take more control over your credit, collections and accounts receivable processes.
