When you extend credit to your business customers, you’re taking a risk. You need to be proactive about screening your customers and employing ongoing monitoring to protect yourself from default. The consequences can be big. The Federal Trade Commission (FTC) reported $10 billion in losses from fraudulent activity—more than a 13% increase from the year before.
Credit risk monitoring is key to business fraud prevention and protecting your cash flow. Yet, many businesses choose to evaluate credit at onboarding and then only look back when problems arise. By the time you detect an issue, it may be too late to recover what you’re owed.
Credit risk monitoring serves as a proactive approach to managing the likelihood of defaults and delayed payments. By keeping an eye on your client’s financial health, you can make better credit decisions, mitigate exposure to high-risk clients, and reduce your risk of financial loss.
Portfolio Scoring and Analysis
A crucial element of credit risk monitoring is portfolio scoring and analysis.
This goes beyond checking individual credit. Portfolio scoring evaluates your entire accounts receivable to determine your level of risk. You get a clearer picture of exposure and can address areas of concern.
You can also use portfolio scoring to set a baseline for your risk tolerance, giving you a way to evaluate new clients against your existing portfolio and analyze the impact. You can also identify deteriorating financial conditions in key sectors, automatically flagging accounts that require closer monitoring or adjustments to credit or payment terms.
Portfolio scoring gives you earlier insight into credit exposure across your entire client base to reduce your liability.
Account Monitoring
While portfolio scoring and analysis offer a valuable snapshot of your overall credit risk, it is ongoing account monitoring that enables you to stay ahead of potential issues.
Account monitoring provides real-time alerts and updates on significant changes in a client's credit profile, ensuring you are aware of any potential risk before it escalates.
Changes in credit score, payment history, or public records (such as bankruptcies or liens) can all indicate shifts in a client's ability to pay what they owe you. With account monitoring in place, you get automated notifications whenever such changes occur. This allows you to reassess creditworthiness and take action to minimize risk.
Account monitoring also lets you track changes across active accounts, making it easier to spot trends and patterns that may indicate broader issues within a client base. For example, if several clients experience a similar downturn in credit scores, this could be an early warning of an economic shift or industry-wide financial instability.
Business Fraud Prevention Through Credit Risk Monitoring
Credit risk monitoring plays a crucial role in business fraud prevention. By actively monitoring credit reports and changes in client behavior, you can detect the warning signs of potential fraud and reduce your risk. A study by the Association of Certified Fraud Examiners (ACFE) shows that using data analytics reduces the impact of commercial fraud by up to 47%.
For example, if a client suddenly requests an increase in their credit limit while showing signs of financial distress, this could be a signal that they intend to exploit the credit extension to their advantage. By using credit risk monitoring tools, you can identify such behavior and take appropriate action, whether that means freezing credit lines, investigating the client’s financial situation further, or terminating the relationship if necessary.
Ongoing monitoring is critical to combat the dramatic rise in business fraud. Nearly two-thirds of financial institutions report increased fraud attacks affecting business and consumer accounts.
Implementing a Robust Credit Risk Monitoring Strategy
Strategic credit risk monitoring requires adopting a few best practices, such as:
- Establishing clear risk tolerances: Determine the level of credit risk your business is willing to accept and set benchmarks for evaluating clients.
- Leverage portfolio scoring: Regularly score your portfolio to assess the risk of each account. Use this information to prioritize accounts that need additional attention and to adjust your credit policies accordingly.
- Integrate account monitoring: Set up account monitoring tools to receive real-time alerts about changes in credit scores or financial health.
- Monitor for Fraud: Use credit risk monitoring to detect any signs of business fraud, such as suspicious credit requests or unusual payment patterns.
- Review and adjust regularly: Regularly review your monitoring tools and adjust your strategies as needed, based on shifts in your client base, market conditions, or internal risk tolerance.
By integrating these strategies, you can minimize financial loss and improve business fraud prevention.
Command Credit provides comprehensive business and consumer credit reports on-demand, portfolio scoring and analysis, account monitoring, identity verification, and other tools to detect and prevent fraud. Contact Command Credit today to get started.