In the current business and economic environment, the challenge for commercial lenders is to acquire more ‘good risk’ customers at the lowest possible cost.
Many of the cost-of-living factors that are currently impacting consumers are having either a direct, or knock-on impact on business’ financial health, or otherwise.
During the COVID-19 pandemic, the government quickly put measures in place to protect UK businesses from the negative impacts of the economic downturn. However, the strategy for reducing the impacts of the cost-of-living crisis on SMEs is more uncertain. This is leading to increased demand for credit, but also to increased financial stress and, potentially, reduced affordability in the near term at least.
Several of the key factors currently impacting businesses are:
- Inflation in raw materials, fuel costs and energy costs. These are increasing the cost of doing business, stifling growth ambitions and increasing the need for credit. The impacts are especially pronounced in sectors such as farming, logistics and high-energy industries such as manufacturing.
- Reduced consumer confidence and levels of spending. This is negatively impacting business revenues, especially in ‘luxury’ sectors, hospitality, and even in clothing and food retail.
- Brexit challenges to free flow of goods. These are increasing workloads and costs and impeding normal business activities with negative impacts on revenues and margins.
- Increased staffing costs. These are related to both a lack of skills and available employees, as well as higher wage demands related to the cost-of-living crisis.
- Slowing economies around the world. These have a negative impact upon UK businesses that export goods or services overseas.
- The rising cost of credit, SME appetite to acquire credit. Increases in interest rates and inflationary pressure on the cost of doing business is making SME’s more cautious about committing to longer term investment.
Five key requirements for successful SME lending
With multiple factors impacting commercial customers and their affordability, the need for accurate onboarding decisions is more pressing than ever. However, all of the checks and balances required to recognise ‘good risk’ customers can become time-consuming and cumbersome.
This then has a knock-on effect to the customer experience and may also impact a lender’s competitiveness and growth ambitions. However, using a range of relevant data sources from both inside and outside the organisation, combined with real-time decisioning tools, lenders can enhance the onboarding process based on faster, more accurate decision making and reduced manual effort.
The results are lower operating costs, reduced risk and improved compliance with regulatory requirements.
To reduce credit risk, while providing the fast, convenient onboarding experience commercial customers want and expect, the onboarding strategy should include five key capabilities:
- Rapid and effective credit risk assessment. At the beginning of the onboarding process, there must be checks and balances to distinguish prospects who may represent good credit risk. Conversely, customers who have just started out in business, who are requesting loans disproportionate to their income and ability to pay, or who have had previous issues in their payment history, need to be identified rapidly.
- Accurate calculation of affordability (initially, and throughout product lifecycle). For customers who meet overall creditworthiness requirements, it is important to understand their specific affordability criteria to determine the size of the loan that should be offered, as well as suitable repayment terms and conditions. Once the maximum value of the loan offered to a customer has been determined, their affordability should still be monitored on an ongoing basis to minimise the risk of them experiencing financial difficulties or defaulting.
- Comprehensive financial crime checks. Customers that seem to meet credit and affordability requirements also need to be vetted for potential financial crime activities, such as money laundering. This requires in-depth analysis of information pertaining to business owners and stakeholders, including analysis of whether any people connected to the business are Politically Exposed People (PEPs), for example.
- Remain vigilant with your fraud detection and prevention checks. Even if a business seems to meet all credit, affordability and AML requirements, there is still a chance that applicants are not who they say they are, or that applications are otherwise fraudulent. Experience has shown that consumer and business fraud has a tendency to increase in times of financial stress as customers look at ways to acquire access to funds. To minimise such risks, lenders need to ensure that significant owners of businesses can be identified, and that the business itself is genuine and engaged in legitimate revenue generating activities.
- Process automation for efficiency and great customer experiences. While all of these checks and balances are potentially complex, lenders still need to provide a fast, convenient application process and rapid decisioning to meet customers’ needs for faster, fairer funds. This is only possible if data on business customers and decisioning capabilities are fully integrated, and if the decisioning process is automated as much as possible, with referrals only for marginal applicants. As well as providing excellent customer experiences, this kind of automation can also help lenders to reduce onboarding costs dramatically.
How we can help
Our breadth and depth of commercial data and analytics capabilities support fast, highly accurate onboarding and affordability decisions. Our digital commercial onboarding solution offers a single onboarding journey which brings together our data, advanced analytics and innovative software capabilities in one place. Enabling you to make accurate, consistent and insight-driven decisions, Experian is a proven partner with unmatched experience in customer decisioning.
- Our commercial credit and trade credit information improve your understanding of a business’ credit worthiness so that you can offer better, more flexible lending.
- Our automated commercial onboarding, risk acceptance and decisioning reduces the need for manual checks.
- Our real-time insight and user-friendly tools help you adjust your lending policy quickly in line with the market. Add value to business needs through our innovative, data-driven, solution sets.
- We can help you achieve slicker, quicker processes through digitisation and automation. Our technology and insight helps you to operationalise your data at speed and scale.
- Our breadth of third-party data sources including access to SME’s current account transaction data can help you to identity the right customers and more accurately assess their affordability.
- Our automated AML and fraud screening ensures your KYB operations are as quick and effective as they can be.