Credit risk management post-pandemic – Part 2

Credit risk management post-pandemic – Part 2

February 25, 2022

The Covid crisis has taken many accepted truths and thrown them up in the air, like a confetti of commercial confusion. In our first article looking at how credit management has been changed, we focused on some of the basics: interpreting unreliable financial data, how a trio of global financial negatives may have worsened even some of your best-known risks and finally that old chestnut of the dangers of headlong growth in your risk portfolio.

Now it’s time to look at alternative and innovative techniques for dealing with the changed new world, as well the importance of retaining key staff and finally, understanding the bulging liabilities that now disfigure so many post-pandemic Balance Sheets.

Corporate identity fraud

Commercial fraud of all sorts has proliferated and become far more sophisticated during the pandemic, as working practices and control systems have been disrupted and financial pressure to maintain revenues and profitability has mounted. None more so than identity fraud perpetrated by customers, whether it is the old ‘long firm’ scam where suppliers are sucked into a long-term relationship and then stung by a bad debt at the end, or the ‘short firm’ con with a newly-established entity set up in a jurisdiction with loose financial and governance reporting regimes, often offshore.

Companies House reform

Even UK-registered corporate entities can be far from what they seem, which makes recent delays to urgent Companies House reforms through the postponement of the Economic Crime Bill extremely frustrating.

Corporate impersonation

There has been a significant rise too in corporate impersonation, where criminals pose as well-known and respectable corporations. They may go to the extremes of creating highly realistic ‘copycat’ websites and email addresses and even hijacking the email accounts of senior executives.

Identity verification

Investment in modern identity verification techniques and software will pay handsome dividends. Verification should of course never be left until the collections department is struggling to recover an overdue debt, it is a fundamental part of credit approval at the start of a customer relationship, but it also needs to be reviewed on a regular basis.

Using technology to maximise long overdue recoveries

There comes a point in even the most dedicated credit management functions, where the sheer scale and complexity of pursuing unusually old receivables can push them into the ‘Too Hard’ file. The older the debt, the higher the write off potential, often because communication channels go ‘cold’. Emails are no longer answered (or even delivered), contact numbers become unattainable and the customer is ‘Not Known At This Address’.

For larger aged debts, deploying a specialist debt collector can be justified but what about all the smaller ones? Debtor tracing has moved on light years since before the crisis, with sophisticated cloud-based AI-driven matching techniques able to follow trails that previously defeated the most diligent investigators now available.

Philip King, the former head of the Chartered Institute of Credit Management recently quoted extraordinary results from using such technology in 2021. One international provider of hygiene services achieved a success rate of 81% on debts averaging more than 264 days overdue. Another organisation in the global healthcare sector collected 92% of debts overdue by an average of 136 days.

Retaining and recruiting credit management staff

For all the possibilities of AI and fancy technology, there is no substitute for experienced credit staff with a detailed knowledge of how their organisation functions and an encyclopaedic knowledge of its receivables’ portfolio. Retaining key people is essential, not least because of the cost and sheer difficulty of replacing them in current times of endemic labour shortages. There needs to be a plan to keep them on board and maintain their productivity after two years of extraordinarily challenging times.

Bulging liabilities

£76bn of government backed Covid loans, more billions of unpaid commercial rent and vast amounts of deferred VAT and PAYE now on Time To Pay deals stretching out up to five years: many balance sheets are unrecognisable compared to two years ago and outside any normal credit risk criteria.

But are they necessarily bad news?

Many companies used Covid loans on soft terms to replace more expensive and shorter-term finance. Others used the extra funding to invest wisely in automation, modernisation, acquisitions and other beneficial projects.

The trick is how to sort the positive risk wheat from the potential bad debt chaff.

The answer as always lies in getting sufficient data from the debtor and applying sound judgment; the key factor as so often will be the impact on cash flow in the short, medium and long terms.

Get in touch

If you are affected by the issues featured in this article, Opus is here to help. We has extensive experience of difficult situations like theses. You can contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.