Credit risk management software

Customer risk management is a core part of the cash collection process. Digitising this function with a credit risk management software brings many beneficts.

• Centralisation of all risk data

Software like LeanPay centralises all your risk data in one interface. It combines external information from Creditsafe, Altares, Ellisphere or COFACE (score and customer risk level) with alerts in case of credit limit breaches. Companies working with credit insurers can also input their authorised exposure limits.

• Optimised collection strategy

Based on this data, you can create an adapted debt collection process. For example, group high-risk customers and assign them a specific reminder workflow with shorter delays between steps.

• Reduction in unpaid invoices and disputes

Being able to make better decisions about high-risk customers helps significantly reduce unpaid invoices and avoid legal actions.

Customer risk refers to the possibility that a customer will not pay their invoices on time or never pay at all, which constitutes an unpaid invoice.

Whether it's a late payment or a full default, this risk is present for all B2B companies.

Credit risk management covers all the methods a company can use to reduce and control this risk.

This includes financial analysis of potential customers and measures to secure receivables.

Customer risk can manifest itself in different ways in your business, depending on its severity:

• Late payments: Often the result of a customer facing financial difficulties or trying to preserve their cash flow. Some delays can also be unintentional, caused by forgetfulness if reminders were'nt sent before the due date.
• Unpaid invoices: When a company goes bankrupt and becomes insolvent, it can't no longer pay its debts, resulting in unpaid invoices. Disputes can also lead to defaults. Proper invoicing and service tracking help prevent such issues.
• End of the commercial relationship: If payment behaviour deteriorates to the point of putting your business at risk, stopping the commercial relationship may be the best way to protect your company. While losing a customer is regrettable, it’s better to end the relationship than continue one that threatens your financial health.

Financial scoring is a tool that assigns a numerical score (generally expressed out of 100) reflecting the financial health of a prospect or a customer. This rating is based on various financial, legal and behavioural criteria analysed objectively.

Companies such as Creditsafe, Altares, Ellisphere or COFACE offer this type of information. Our credit risk management software is connected to these databases, allowing you to access them directly in LeanPay.

The aim is to establish a probability that the prospect/customer will meet their future payment obligations.

A company showing negative signals will receive a low score, indicating a high risk of non-payment. On the other hand, a good score reflects low risk.

For example:

• A score between 0 and 29 shows clear signs of financial weakness and represents a proven risk of non-payment.
• A score between 30 to 50 means some alerts were detected. This indicates a likely risk of non-payment.
• A score between 51 to 70, means the company is in generally good financial health. Risk is limited.
• Lastly, a high score from 71 to 100 indicates excellent financial strength. The risk of non-payment is very low.

This numerical scoring allows for simple risk assessment and decision-making based on objective data rather than subjective impressions.

Financial scoring is a valuable decision-making tool for finance teams managing customer risk. It's also helpful for sales teams, who can quickly identify and filter out high-risk prospects during their outreach.

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Here are some of our best practices for successfully managing credit risk:

1- Implement credit risk procedures

Before deciding on payment terms, it's essential to assess the customer's risk. This involves analysing their financial health, payment history, credit ratings, etc.

2- Define and enforce a clear credit policy

Define credit limits, payment terms, and collection procedures. Clearly communicate this policy to customers and include it in your general terms and conditions.

3- Monitor customer invoices closely

Monitor outstandinamounts, payments received, overdue invoices etc. Act quickly in case late payments with systematic reminders. With dedicated software, the process is automated for you 😉

4- Diversify your customer base

Avoid building your entire business around a few very important customers.

5- Use credit risk management tools

Risk scoring software, alert systems, automated collection tools. Ask for a demo of our credit risk management software LeanPay!

6- Train and empower sales teams

Make sure the sales team is well aware of the credit risk issues. It's better to avoid risky customers than face late payments, time wasted chasing them, or legal fees.

7- Consider credit insurance

Transfer part of the risk to an insurer by subscribing to credit insurance.

8- Staying in touch with your customers

Communicate regularly to identify early signs of financial difficulties. Your sales team can be a big help here.

To evaluate the solvency of a potential customer, you need to thoroughly analyse their financial, legal, and economic health. This helps identify risks of late payment or default before starting the business relationship.

The main steps in this analysis are:

• Check the registration of the company in a legal register (RCS in France, Companies House in UK...). Review also a company certificate or a "Certificate of Incorporation".
• Find a debt statement to identify any past unpaid debts, pledges. You can find informations on Companies House's website.
• Analyse the annual accounts of your customer: turnover trends, solvency ratios (repayment capacity, working capital needs, liquidity), self-financing capacity, and profitability. Compare these datas over several years.

• Check for collective proceedings (safeguard, restructuring, liquidation) through Companies House or The Gazette.
• Use financial scoring tools, internally or via external providers, to note the financial health of your prospect or customer.

Regular monitoring of these indicators, even after the commercial relationship begins, is recommended to anticipate non-payment risks. Using credit risk management software facilitates this monitoring and decision-making.

When you offer payment terms to clients, you're effectively extending them credit. A credit limit is the maximum exposure you’re willing to accept, i.e., the maximum customer risk.

Setting a credit limit is like acting as a lender. As with any loan, you must ensure the customer’s repayment capacity and keep credit within their financial limits.

Setting an appropriate credit limit helps secure your receivables by limiting the risk of non-payment.

The credit limit is usually calculated by combining customer risk scoring with financial indicators such as:

• The customer’s financial capacity (the exposure must remain consistent)
• The customer’s turnover (the credit limit should be well below it)
• The negotiated payment terms (delays, payment methods)

A well-calculated credit limit is a strategic decision that reduces the financial risk the client poses to your business.

In our credit risk management software LeanPay, you can indicate a credit limit for each customer, whether it's yours or your credit insurer's. You can also define thresholds: 50%, 70%, 90% etc. You'll be notified each time there are exceeded, allowing you to act quickly.