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Why it’s your business to know your customer’s credit rating during a recession

by | Jul 20, 2020 | 0 comments

The Australian economy is currently experiencing its biggest economic contraction since the
1930s. Australia’s triple A credit rating is intact but on a negative slope, according to credit rating agency, S&P Global. In June, the Reserve Bank of Australia (RBA) confirmed there is considerable uncertainty about when the economy will recover.

What is certain is that the financial contagion of the Coronavirus pandemic has hit every industry. The Organisation for Economic Co-operation and Development (OECD) report that some industries like arts and tourism are in full shutdown. Meanwhile, others such as construction and professional services have declined by half.

Economic inactivity puts a huge question mark around a business’ ability to repay its debts. That means that previously creditworthy businesses may now be bad debt risks; prompt payers may quietly start to withhold payments.

Does your company know which customers have a deteriorating credit rating?

Key points

  • Economic inactivity affects a business’ ability to repay its creditors. More debts can become overdue.

  • A credit monitoring service alerts your company when a customer registers a significant credit activity in the wider market.

  • Your company’s credit risk exposure increases as your customers’ financial health declines.

  • A credit monitoring service identifies credit risks to your company by presenting crucial payment, court action, and company officeholder information about your customers.

Get Started with ezyCollect’s Credit Insights

What is a company credit rating?


A credit rating or a credit score is an indicator of a business entity’s likelihood to meet its financial obligations. A credit reporting bureau like illion analyses dozens of credit rating variables including an entity’s credit history, publicly available financial and organisational information and even court actions to determine its creditworthiness and financial stability.

To arrive at an overall credit appraisal for an entity, illion for example, will assess the likelihood that the entity will experience severe financial distress or failure in the coming 12 months, as well as its risk of paying severely late.

What is business credit monitoring?

Credit monitoring is a risk mitigation service provided by credit reporting bureaus. A credit
reporting bureau will collate, analyse and report on a business entity’s noteable
commercial credit activity as it trades in the marketplace. Changes in a company’s credit score can be picked up quickly by a credit monitoring service.

Many companies that offer trade credit to their customers rely on a daily credit monitoring
service. That’s because companies want to know when their customers are showing the first
signs of financial distress. Think of it as an early warning system to avoid potential bad
debts.

Above all, a company’s credit risk exposure increases as its debtors’ financial health declines.

Credit monitoring in a stable economy

In a stable economy, employment and growth are steady and it’s business as usual.
Businesses can be more certain about which customers need close monitoring. Depending
on its sector, a business may confidently predict the customer segment that is likely to
register the most payment defaults, bad debts, and insolvencies. That becomes the customer
segment in which they focus their credit monitoring service.

In Australia for example, illion publishes a quarterly Late Payments Analysis and Business
Expectations Survey
. The slowest paying industries have been consistent for some time:
retail, mining and manufacturing often top the list. Seasonal fluctuations also generate
predictable payment trends—we see retailers paying their invoices faster after the busy
Christmas period.

Credit monitoring in a recession

During an economic downturn, consumers and companies hang on to their cash and the entire supply chain suffers. In unprecedented times as we have seen with the COVID-19 pandemic, some businesses will quickly grind to a halt.

Therefore, during a recession, the usual payment patterns do not apply. Many more businesses become susceptible to cashflow constraints as financial pressures ripple all the way down the supply chain. Previously good payers may not pay on time. A company’s credit rating score could change more frequently than usual as trade credit activity fluctuates.

Most disturbing in a health pandemic is how quickly cashflow cliff dives and businesses can fail.

Get Started with ezyCollect’s Credit Insights

What credit monitoring tells you


Companies in financial trouble aren’t quietly slipping away. They are registering negative
credit activity in the market. However, without credit monitoring, it’s almost impossible for a
supplier to know its customers’ bigger trade picture.

Credit reporting agencies like illion can collect and feed back credit rating data about your customers. For example, illion’s credit monitoring service can alert your business when your customer registers a change in significant credit activity:

  • Collection Notification
  • Court Actions
  • Director Change
  • Financial Change
  • Public Filing Notification
  • Status Change
  • Score Change
  • Shareholder Change

What credit monitoring alerts mean


Alerts are generally described as positive, neutral or negative events in relation to a
company’s credit rating. ezyCollect’s credit monitoring service brings these alerts straight to your dashboard.

ezyCollect’s dashboard includes credit alerts on your customers



A collection notification is typically classed as a negative event. It indicates that the
original creditor has given up trying to recover a debt and has referred it to a debt collection
agency.

For example, illion will issue a negative event alert about a business entity when it has
received instruction to collect an unpaid debt from it.

Court actions are negative events. The various courts across Australia are responsible for
providing credit reporting bureaus with data on writs or summons that have been issued to a
commercial entity in relation to an outstanding debt.

Director changes is a neutral event as it is a notification that a company officeholder has
changed. Still, it’s important for a supplier to know when their customers’ directors change.
This could be because a director may have signed a director’s guarantee that they will be
personally liable for their company’s unpaid debts. If this is the case, then the supplier would
want to know if that director moves on.

In Australia, for example, a business must keep its company officeholders’ details up to date
with the federal corporate regulator, Australian Securities and Investment Commission
(ASIC). Director changes are significant because officeholders have obligations to comply
with reporting and legal requirements.

Financial change is generally a neutral event as it indicates that a monitored company has
lodged its financials at ASIC for review.

A public filing notification is a negative event. It informs that a creditor of a business
entity has made an application to the court under the Corporations Act to wind up that entity
due to insolvency.

Status change alerts could be positive or negative as they relate to the current ASIC status
of the entity. An example of a negative alert is when ASIC confirms that an entity has moved
from ‘Registered’ to ‘ Under External Administration’. An example of a positive alert is when
ASIC confirms that an entity has moved from ‘Strike-off action’ back to ‘Registered’.

Score changes report that a company’s late payment risk and /or failure risk scores have
changed. These credit scores indicate the likelihood that a business entity will pay severely late and fail in
the next 12 months. Scores can improve, stay the same, or decline, and therefore generate a
positive, neutral or negative alert respectively.

Shareholder changes are a neutral event. ASIC notifies that a company has updated their
register of shareholders as required by law. Shareholder changes are important to know
because they indicate a change in ownership of the company which may affect employees,
suppliers and customers.

In summary:


During an economic recession your customers’ typical payment behaviour can deteriorate as
trade inactivity persists. A credit monitoring service can help you to quickly identify
customers that pose a heightened credit risk to your business.
Financial controllers and credit managers typically use credit rating insights to mitigate
foreseeable bad debt risks to cashflow.

Try ezyCollect’s Credit Insights for 2 months free including 3 free credit score checks each month.


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