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5 Benefits of Automation in Credit Risk Management

What you’ll learn

  • Understand the key challenges in traditional credit risk assessment strategies
  • Analyze the role of technology in overcoming these challenges
  • Take a look into how automation can solve the challenges and give analysts an edge in credit risk assessment

A crucial element that you need to manage in your growing business is credit risk. In this competitive business climate, it becomes essential for businesses to sell their goods or services on business credit and invoice the customers for payment at a later date. A crucial element that you need to manage in your growing business is credit risk. In this competitive business climate, it becomes essential for businesses to sell their goods or services on business credit and invoice the customers for payment at a later date. Credit risk management is critical to deal with possibilities of losses resulting from a customers’ failures to repay or meet contractual obligations. Such breakups in accounts receivables interrupt cash flow and increase collection cost. The traditional practice of improper credit risk management has often caused negative implications on accounts receivable. In this blog, we take a look at challenges faced by mid-sized businesses using traditional credit practices and the alternative approach to eliminate them. At HighRadius, we guide our customers to establish a proactive credit risk management system with RadiusOne Credit Risk App. It automates your correspondences via email and an approval workflow to ensure standardization of credit approvals. The online credit application form enables you to make better credit decisions and secures your accounts receivables. credit risk management

Traditional Credit Risk Management in Mid-Sized Businesses

Mid-sized businesses often encounter issues with their accounts receivables due to improper credit risk management. Due to the limited workforce, time constraints, labor-extensive tasks, absence of bank guarantees because of added expenses, lack of customer data, and lack of credit scoring tools, the accounts receivables get interrupted and results in bad debts.

Let’s take a look at how conventional credit practices have been hindering the workflow.

1. Absence of Customer Information

With mid-sized businesses, getting access to the latest and accurate customer transaction-level data such as payment received, invoices past due, etc. is always a concern. Access to real-time accurate data is necessary while performing credit reviews of existing customers and onboarding new customers.

For external credit data, analysts have to manually scour through disparate credit data sources that can be time-consuming and prone to error. Credit data aggregation is a tedious process and requires a lot of time and effort from the analysts’ end. Gathering credit data reports from banks can take up to 15 days, which adds to the time taken to complete the whole credit review process.

2. Non-Standardized Credit Scoring Model

To assess the creditworthiness or risk of a customer, we need to estimate the probability of default based on historical data. Mid-sized businesses often consider each instance on an individual basis, be it customer onboarding or delayed payment management. With limited resources in AR teams, in many situations, the credit review and customer onboarding decisions are made by the analysts or the salesperson based on their personal judgment from the initial conversation stages.  Manual credit risk check

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Oftentimes, the decisions taken on personal judgment are made without validating the creditworthiness of the account, which may result in a bad-debts. Such credit evaluations can put the business at risk if the customer fails to pay back on time. Establishing a standardized credit scoring system can reduce the risk of accounts turning into bad debts by ensuring that the creditworthiness of all the customers is validated through a systematic approach.

3. Manual Correspondence Management

While paper-based correspondences may seem cheap, in the long run, they are quite expensive. Many mid-sized businesses majorly rely on paper-based correspondence management, which means that they need to be manually sent (via snail mails or fax) and received. This process can easily take up to 2-3 days which increases the time frame even more. This method of information exchange is time-consuming and expensive.

4. Non-Standardized Credit Workflow

Many mid-sized businesses lack proper workflows for credit approvals. Important credit decisions such as new credit applications, and periodic reviews and credit requests of existing customers, need to go through a proper hierarchical channel for approvals. And, because of the absence of a standardized workflow, it can result in internal miscommunication which can cause wrong decision making. The time taken for a credit to get approved by the senior management delays the whole process. Many a time, the information on the application is incomplete and the collection of that data delays the approval process. These delays create a downstream impact on the prolonged bad debts.

Use Automation to Overcome Credit Risk Challenges

With the help of automation, the whole credit risk management system becomes simpler, less time-consuming, and cheaper than before. This benefits most mid-sized companies wanting to future-proof their receivables.

  • Faster Customer On-boarding- 

    With the help of an online application form, customers can fill in their financial information without missing out on any important detail. This valid and accurate information will then get captured and aggregated in one place. Check out the 6 must-have fields in any credit application form for capturing better customer information.

  • Eliminate Manual Credit Scoring- 

    With the help of existing credit data (gathered through the application forms), and pre-written models and algorithms configured with various industry-specific best practices, the risk scores, risk categories, and credit limits can be automatically assigned. This can save a lot of time and effort on the analyst’s end.

  • Standardized Credit Management- 

    Establishing a structural workflow for credit risk management will help in ensuring that all the important credit decisions are approved through a proper hierarchical channel.

  • Real-Time Credit Risk Monitoring to Lower Bad-Debts- 

    By establishing a transparent and visible system and, introducing reports and analytics, the c-suite can keep a track of the entire process as well as monitor its condition. Real-time risk monitoring can help in identifying risks of bankruptcy, a downgrade of payment ratings, and other news that can help in proper decision making to ensure lower bad debts. Learn more on how automation keeps customer health in check?.

  • Automated Correspondence Delivery- 

    Correspondences are required for credit events such as credit acceptance, credit denial, and information exchange. Instead of using paper-based correspondences, electronic correspondences are a much better alternative. With the help of ready-to-use templates, a lot of time can be saved in drafting the correspondences. Correspondence delivery via emails can save up the cost and time that goes into the whole correspondence creation and delivery process.

How to Maneuver Your Credit Risk Management with RadiusOne?

RadiusOne Credit Risk App enables businesses by providing automated credit risk evaluation and credit scoring to help streamline the credit risk management process, and make faster and accurate credit decisions.

Let’s take a look at the features of the RadiusOne Credit Risk App that has helped many businesses in standardizing their AR Credit Risk process.

Standardized Credit Workflow

Having an automated worklist can help analysts in identifying high-risk customers who require immediate attention and take the necessary actions on those accounts. This automated worklist can help in pacing up the account identification process and increase the credit approvals.

Automated Correspondence Management

A majority of firms have to manually manage the correspondences in paper-based format. As an alternative, RadiusOne provides automated correspondences which can be sent and received via emails with ease. With the help of easy-to-create correspondence templates for credit events including credit acceptance and denial, the speed of the process increases while eliminating the paper-extensive process.

Faster Customer Onboarding

Onboarding new customers can get tedious and time-consuming. Keeping that in mind, RadiusOne has created an online customer onboarding application system that can speed up the credit application process by capturing complete and valid information for new accounts. With the help of easy-to-use templates that are integrated with the credit system, the whole customer onboarding process becomes faster.

Standardized Credit Scoring

RadiusOne provides automated credit scoring with the help of built-in credit data that was captured through onboarding customer applications, credit reports, and data provided by banks or credit agencies, which can ensure a faster and accurate credit scoring process. Data alongside, pre-loaded models and algorithms that are specifically configured by keeping industry best practices in mind can auto-assign the credit risk scores, risk categories, and credit limits. This standardized practice can help a business in establishing an optimized credit scoring model.

Standardized Credit Approval System

Credit approval decisions need to follow a standardized hierarchical channel to ensure that decisions taken are accurate and right for the business. Approving the credit limit for new customers as well as credit requests from existing customers can impact a business’s revenue if the decision takes a downfall. Thus, to ensure that the approval decisions are taken through the rightful channel, RadiusOne has provided credit management workflows, through which an analyst can put in the request to the senior management to get a credit limit approved.

What to Do Next?

Credit risk management can be challenging for many mid-sized businesses. The traditional credit risk practices that are still in play, are restraining the growth of the company with rising outstanding receivables. However, automation can help risk-proof your receivables with minimized bad debt. Automation plays a major role in making your credit risk management optimized and saving your revenue from going downhill. So what should you do next to incorporate automation, and stay ahead in the race?

  • Evaluate your current credit risk management.
  • Discuss with your team to narrow down all the hurdles involved.
  • Get collective feedback from your customers and analyze their issues.
  • Look at your options on how to drive credit risk management better.
  • Analyze the current market trends and introduce them into your system.

Learn more about credit risk management and the A to Z of credit scoring with this blog on The Theory of Credit Scoring Every Mid-sized Business Should Know!

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HighRadius Integrated Receivables Software Platform is the world's only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway - covering the entire gamut of credit-to-cash.