In spite of high inflation, rising energy costs and other macro-economic challenges, around a quarter of UK SMEs remain resilient – making them ‘good risk’ prospects for lenders.
But according to John Griffiths, Market Engagement Director for Commercial Credit and Risk at Experian, uncovering lending opportunities in this climate is not easy. It requires a 360° view of each customers’ business – including a granular view of their financial health, their sector-specific credit risks, and their ability to withstand future increases in the cost of doing business.
The last few years have presented major challenges for UK SMEs, from increasing Brexit-related bureaucracy, to rising inflation and major increases in energy costs. But the good news for commercial lenders is that, almost in spite of these tough macro-economic conditions, many UK businesses remain steadfastly resilient.
This is evidenced by SME delinquency rates, which have increased only very slightly over the last six months, and remain just a fraction over pre-pandemic benchmarks. Additionally, and very importantly, most SMEs also seem to be relatively stable in their use of company cards and overdraft facilities, with only marginal increases in usage being observed.
We are also seeing the majority of SMEs increasing their cash savings – albeit slowly – according to data that Experian collates on one million business bank accounts. All of this suggests that SMEs have been able to pass the lion’s share of rising costs onto consumers, rather than having to absorb them within their businesses.
But although many SMEs continue to show resilience in the face of rising business costs, this is not, unfortunately, the case for all SMEs in all sectors. The question for commercial lenders looking to optimise their portfolios is how to differentiate – with a high degree of accuracy – between good-credit-risk customers and those that are becoming less resilient, and, therefore, less able to meet their financial commitments over time.
The key to success: fully understanding customers’ businesses and risk profiles
With inflation still high and growth in asset finance (particularly involving revolving credit) showing pressure in certain sectors of the SME market, any analysis of customers’ financial health should be more than a point-in-time snapshot. Instead, lenders now need an in-depth understanding of a range of macro-economic factors, and how they may impact customers’ ability to pay for the entire lifecycle of the credit product or facility in question.
To get this 360° current and future view of credit risk factors, and make the best commercial lending decisions, lenders need answers to a number of key questions.
Which sector does your customer operate in, and how does this impact their credit risk?
The current economic conditions are impacting different business sectors in different ways. This is clearly demonstrated by the fact that defaults are rising at a much faster rate for accommodation, food services, retail, logistics, manufacturing and other energy intensive companies than for other sectors of the SME market. Additionally, demand for loans is being impacted in these industries in particular, partly due to lack of confidence among lenders.
As a result, certain customers and prospects – and especially those in energy intensive industries – are likely to have significantly higher credit risk profiles. Conversely, the opportunities to identify and onboard ‘good-risk’ customers are greater for SME sectors less affected by higher energy prices, such as agriculture businesses and providers of support services, postal and land transport services. By focusing in these areas, lenders can continue to identify significant market opportunities and grow their portfolios sustainably.
Will your customers continue to be financially resilient in the future?
Understanding a commercial customers’ credit worthiness requires in-depth analysis of a range of financial health indicators, from previous defaults to cash reserves in the business bank account, to use of company cards and overdraft facilities. The problem is that even careful due diligence on customers’ current financial health may not highlight possible future risks.
For example, Experian commercial CAIS and CATO data – and pricing data from Ofgem and Bionic, suggest that up to a third of businesses may be faced with a cash crunch when the government’s current generous energy deal is replaced by a less comprehensive package in the coming months – increasing pressure in the system significantly.
Understanding which potential customers are most at risk from such threats is critical for building a resilient and profitable portfolio going forwards. That’s why, in order to get a good understanding of the sustainability of a customers’ ability to pay, lenders need to access accurate macro-economic data and forecasts.
Are other factors likely to impact your customers’ credit risk, and to what degree?
Sometimes, individual customers are impacted by factors that are – at least initially – difficult to understand and factor into lending decisions. Our data shows, for example, that younger companies generally represent greater credit risk. This isn’t always the case, of course, but it should be a significant consideration in all lending decisions.
By combining data from the SME market with customer financial information and broader economic forecasts, lenders can create a full view of credit risk that protects your portfolio and business for the long term.
How can we help?
To give you a 360° view of credit risk for each of your commercial customers, we combine data from multiple trusted sources – including our CAIS bureau data, CATO data, and macro-economic forecasts from our in-house teams of experts.
Using advanced analytics, we can help you understand your customers’ credit risk across four key vectors: their financial resilience, their ability to ‘survive’ for the lifecycle of the credit product, their projected growth and their affordability with regards to new credit products.
In this way, we can help you identify customers with low credit risk, high growth prospects and the ability to last the distance. Likewise, you can avoid high-credit risk customers, or low-risk customers with low growth scores who may run into affordability issues in the future.
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