Doing business in a high-risk environment

For more than a decade, companies have grown accustomed to doing business in a relatively low-risk environment. Customer and credit losses have been very low amongst both households and companies.

Now, risk levels are changing dramatically. For some industries, higher risk is already a fact. This applies, for example, to consumer goods and hospitality. In other industries, such as real estate and financial services, the risk will increase in step with the duration of the corona crisis.

Dare to trade in uncertain times
Uncertainty itself contributes to reduced business activity, but to stop selling products and services for fear of not being paid is not the solution in the current situation. The economy can only survive if entrepreneurs, merchants and consumers continue to trade. This applies to both individual companies and to society at large.

Companies must adapt quickly. A long-dormant competence must be revived – how to make credit decisions in a high-risk environment.

Bisnode is witnessing a decrease in the number of credit information reports throughout Europe, and at the same time a dramatic increase in the number of customers on watch. In other words, our customers are trading less than usual with new customers and devoting more time to monitoring their existing customers. Companies that only a few weeks ago used high credit ratings as the sole measure for doing business, and low credit ratings as the only reason for dismissing a business opportunity, now need to review their credit approval processes.

Credit reporting enables trust and drives business
It is the responsibility of our industry not to discourage trade. We do not want to cause unnecessary decline in a situation that has the potential to quickly develop into a global recession. Our job is to provide the right guidance that enables companies to dare to do business with each other. We must remember that the purpose of credit reports and credit scores is to create trust and to facilitate trade.    

Credit reporting is based on both historical data (such as annual reports), and real-time data (such as payment patterns). In our models, individual companies’ history is supplemented with macro data, industry data and statistics from a wide range of sources. We also work with predictive analytics, where large amounts of data are analyzed in order to find general patterns of behavior to predict how an individual or a company is likely to act in the future.

A credit rating or a credit score is not, in itself, a decision. It is intended to form part of a broader decision basis. To this, suppliers must add their own data, knowledge and experience of customers and potential customers. 

Here are some tips for making credit decisions in the new environment:

1. Be data driven. Use credit rating services that combine customer-specific historical data with macro and industry data and predictive analytics to sort and rank customers - for example, by real risk level and business value.
2. You know your customer best. Use your own customer intelligence. The fact that a particular customer is currently lagging behind with payments does not necessarily mean that they are about to cancel their payments.
3. Rank which customers your business is most keen to retain and be prepared to discuss solutions if they are having problems. Be flexible - for example, when it comes to order sizes and credit terms towards customers who are having problems. Try to be tough with solid and liquid customers who are trying to take advantage of the corona situation in order to get better terms.
4. Before starting new relationships with customers in exposed industries, carefully consider whether, according to credit reports, they had problems prior to the corona crisis. Discuss the situation with them. After all, the risk may be manageable.
5. Monitor how various state aid measures have been designed. They may lower your risk to an acceptable level, as a supplier to certain clients.

Magnus Silfverberg, CEO Bisnode