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Dec 2022 | Credit Decisions | Data Insights | Risk Analytics
By Posted by Nick Vanstone

Being able to quickly and effectively assess the affordability of facilities for commercial customers is critical.

Not only does it help meet increasing demands from regulators – especially with respect to responsible lending. It also improves margins based on reduced referrals and underwriting; minimises bad debt through reliable and automated application of affordability criteria; and enhances and accelerates customer experiences to create new competitive edge.

These are uncertain times for UK businesses. As well as coping with inflation, global and local supply chain issues and labour shortages, there’s also low consumer confidence to contend with. All this means that even if a business can afford repayments on a certain facility today – their resilience may soon be put to the test as macro-economic challenges continue.

The commercial lending market is also evolving rapidly, and banks are now obliged to share credit data and Open Banking data on their SME customers under the Commercial Credit Data Sharing initiative (CCDS). Thilst beneficial to all lenders, this is opening up new opportunities for fintechs and challenger banks who are steadily increasing their share of the commercial lending market.

This doesn’t mean to say that there aren’t great and growing opportunities in commercial lending, however. As always, many businesses continue to thrive, representing good credit risk for organisations who can find customers that are a good match for their risk tolerance and business strategies.

The question for lenders, then, is how to find and lend to customers with the right affordability criteria for their portfolios quickly and reliably. It’s all about ensuring that businesses can meet their repayment obligations – not just today, but in the short and mid-term future as well. Affordability calculations also have to be comprehensive, accurate, and as automated as possible to deliver the best possible experience for customers who are used to doing everything online, and having answers in near real time.

How to get commercial affordability right

Assessing affordability for commercial customers requires different approaches and data, depending on the type, size, and duration of the facility. However, there are three universal strategies that can help lenders protect their organisations and deliver the best customer service in times of economic uncertainty and rising inflation.

1. Source and analyse the right data to support accurate affordability decisions

Accessing the right data to make accurate affordability decisions is not always easy. For example, Non-Limited Businesses and small Limited Businesses are not required to provide Profit and Loss (P&L) data. And, even where this information is available, it is typically between 10 and 22 months out of date. Fortunately for lenders, a number of data sources are available that – when analysed and applied in the right way – can provide a clear view of a businesses’ affordability. These include:

    1. Current Account Turnover (CATO) and Commercial Credit Account Information Sharing (CAIS) data, which provides a clear indication of a businesses’ financial performance, debt obligations, and likely affordability (typically for lending under £50,000).
    2. Categorised Bank Account data to arrive at a pseudo Profit & Loss report for the business (typically for lending up to £150,000).
    3. Management Accounts data including financial cash flow forecasts to gain an in-depth view of the business, its long-term health and future expectations (typically for lending above £150,000).

2.  Taking a forward-looking approach based on predictive modelling and macro-economic forecasting

The key to ensuring a business customers’ future affordability and resilience to market fluctuations, future interest-rate rises, and other macro-economic factors is to create and run predictive models around the available affordability data outlined above.

Projections of present and historical CATO data, for example, can show if the business has a stable or growing income, as opposed to a declining income and worsening balance. With CAIS, on the other hand, we can see trends in terms of rising and falling debt and payment obligations. Combining these measures with other aspects of the business’ track record provides insights into the sustainability and, if relevant, the growth trajectory of the business over time – increasing a lender’s comfort level around future affordability for the facility in question.

3. Automating affordability assessments to improve efficiency and customer experiences

Automation is a key way in which lenders can start to offer their customers a more streamlined commercial lending experience. However, it also makes great commercial sense, allowing lenders to reduce operating costs related to manual affordability processes, thereby increasing margins on a range of facilities. If the average cost to underwrite a case is £75-£125 per application this can represent a significant saving per application.

However, automation can also help lenders to reduce bad debt based on more accurate and reliable application of affordability criteria. In some strategy exercises that Experian has undertaken, we have seen a reduction in bad rates utilising a CATO/CAIS-based affordability strategy, over and above the credit risk strategy, of around 20%.

How Experian can help

Experian offers some of the market’s most comprehensive and trusted solutions for commercial affordability.

Through consultative engagements, we have built commercial affordability models for clients in banking, commercial mortgage lending, asset financing, and many other sectors. These are based on CAIS data, CATO data and historical customer data to create a clear and accurate view of customer affordability.

We also offer a commercial ‘categorisation engine’ that uses Open Banking data to provide granular commercial affordability assessments based on 48 income and expenditure categories. This has shown an accuracy rating of around 90% during client proofs of concept, giving clients a simple and effective way to optimise and automate affordability assessments.

In all cases, our affordability tools and models draw on in-depth macro-economic forecasts from our in-house economics teams. These consider the impact of rising interest rates, energy prices, and other factors that could affect a customer’s affordability in the future – helping lenders minimise credit risks and build an ever- stronger portfolio.

Finally, but equally importantly, our affordability solutions help lenders to automate and accelerate their onboarding decisions, providing the fast, slick experience today’s commercial customers are looking for.