Which tools to secure your inter-company credit?

"Know your customer" refers to the process of verifying the identity of a company and its associated documents (recent Kbis extract, copy of RIB, articles of association of the company, proof of identity of the manager or president of the company, even the list of beneficial owners).

This process of getting to know third parties must be initiated upstream of the order at the time of entering into a relationship (onbording process). It is a prerequisite for "due diligence ", which makes it possible to secure the opening of customer accounts. This process also serves as a bulwark against documentary fraud (IBAN, Kbis, balance sheet...) and answers the following questions about identity:

• Does the prospect really exist?
• Is the corporate identity the right one?
• Is the leader the right one?
• Is the legal documentation provided by the client authentic and up-to-date?
• Is the VAT number and/or IBAN correct?

With this first line of defense, the exploration of customer knowledge aims to limit fraud at the beginning of the relationship and thus limit the risk of non-payment. As part of the fight against VAT fraud, the government is planning a progressive obligation to use electronic invoicing for any company liable for VAT and invoicing to professionals between 2023 and 2025.

One of the challenges for companies in credit risk is to have an approach that integrates both their internal and external data in the form of a dashboard around synthetic indicators.

In credit management, the objective of a dashboard is to identify, monitor and control the risk of a portfolio of customers or prospects. It is a steering tool that summarizes activities while crossing criteria to provide relevant information.

Its purpose is to reduce uncertainty, stabilize information, facilitate communication, stimulate reflection and control risk. Within the framework of a credit management policy, it accelerates the decision-making process and answers questions such as

• What is the distribution of the risk of default in my client or prospect portfolio?
• What is the distribution of default scores or probabilities across the portfolio or by company?
• What are the outstanding amounts that have been granted per company?
• What are the paying profiles?
• Which companies in my portfolio are being monitored?
• Which companies in my portfolio are in receivership (receivership, judicial liquidation, safeguard plan, etc.)?
• How is my client portfolio distributed (geographical area, country, region, department, etc.)?
• ...

Each indicator must be associated with a decision making objective or a quick verification. It must be concise enough to be understood in a minimum of time and to trigger the expected action. This proactive and synthetic approach is necessary for the company, in order to :

• Appreciate the global context in the implementation of action or constructive operational reflection,
• Take steps to correct the situation, thus avoiding bad debts,
• Determine if the risk is too high on certain customers and launch targeted commercial actions to reduce them,
• Ensure profitability, know how to manage cash flow and the quality of outstanding amounts in order to identify the problem areas in the portfolio.

Thus, this synthetic display contributes to a thoughtful risk-taking where the information presented is not time-shifted.

Default risk scoring models are tools for measuring the probability of default using statistical methods on company data. In this scheme, the scores attributed to the probability of failure and their evolution are operational indicators intended to assess, in a synthetic way, an estimate of the risk of failure of an entity (judicial liquidation, judicial recovery or safeguard procedure).

In the form of a score expressing a low, medium or high risk, this scoring preventively detects a company's difficulties and qualifies the default in a graduation. Its calculation is based on a know-how combining statistical expertise, mastery of financial analysis concepts, understanding of legal information and payment behaviors, all of which is exploited with artificial intelligence based on algorithms.

The best performing models use machine learning techniques and can predict failure at 80% over 12 months.

Automatically updated with the arrival of each new significant piece of information, this synthetic and predictive approach allows companies to anticipate the risk of default over a year. But this indicator can also, depending on needs such as investment or supplier durability, cover longer terms, up to five years.

The financial analysis is based on balance sheet and income statement items supplemented by ratios analyzed and compared with the business sector over at least two to three accounting years.

The tools most commonly used to perform a financial analysis are the key items of the balance sheet and the MIS (intermediate management balance), the appendices, the ratios and the management report (mandatory for some companies).

All of this information facilitates the analysis of the financial statements, the objective of which is to identify the robustness or fragility of the company around the :

• Financial structure with capital financing ratios, financial balance, financial independence, repayment capacity, etc.
• Liquidity, including customer credit turnover, supplier credit turnover, etc.
• Profitability mainly around the commercial margin, economic profitability, financial profitability, etc.

For example, if a company has negative working capital or even a negative cash position, as well as significant short-term borrowing, supplemented by substantial long-term borrowing, it can be considered financially fragile.

In order to be as accurate as possible, this financial diagnosis must be based on an economic approach to the balance sheet and must take into account a number of adjustments. These include, for example, provisions for liabilities and charges, regulated provisions, investment subsidies, shareholders' current accounts, asset translation differences, capital gains or losses, etc.

A financial diagnosis that does not take these adjustments into consideration does not allow for risk management to accurately assess the solvency and financial health of the company.

Payment behavior reflects the speed at which customers pay their bills, on time or late. Their analysis is based on the accounting movements of the customer's aged trial balance or the company's third-party ledger.

In the case of late payment, there is a high probability that a company is at risk of insolvency. In addition, late payment also weakens the company's cash flow and forces them to resort to short-term financing from their bank to avoid default. The visibility of the payment status of invoices allows to :

• Easily track customer invoice payments and identify any late payments,
• Ensure that the revenue that has been invoiced has been collected by the company,
• Set dunning priorities for large invoices or old receivables,
• Qualify late payments as a departure from typical payment behavior. If the customer is increasingly late with payments or there are more fluctuations in payments, it can be deduced that the company may have cash flow problems.

The best way to avoid late payments is to anticipate them. To be able to do this, it is necessary to have a good visibility on the payment behaviors of customers.

It should not be forgotten that the practice of late payment by a company is increasingly sanctioned by the DGCRF, which is responsible for monitoring compliance with the rules of the Commercial Code relating to payment periods.

Assigning a credit limit is an essential task in credit policy. The limit is defined as the maximum amount of credit that can be held on a debtor (customer) and lost if the customer does not pay. It corresponds to an amount adapted to the volume of business exchanged between the company and a customer; it is considered according to a set of parameters such as :

• Evaluation of the company's solvency and risk profile,
• The financial capabilities of the company,
• Commercial issues and sales forecasting,
• Negotiated payment terms,
• The payer profile. This is defined by the customer's payment history,
• ...

In this exercise, its amount and follow-up are :

• Specific to each company and have a direct impact on the level of turnover achieved with the customer,
• Considered according to the maturity of the company in credit management, its commercial objectives, its sector of activity, the nature of its clientele, the number of its customers and the level of the desired risk of non-payment.

Thus, the authorized amount outstanding makes it possible to monitor the risk granted to each client and to compare this commitment with the evolution of the client's situation.

Under surveillance, this amount informs when the accounting or commercial exposure exceeds the assigned thresholds. It requires close monitoring and regular updating of customer information. With this knowledge, the company will be able to modulate its risk exposure policy and size its credit limit according to its commercial ambitions.

In fact, granting too much credit to a single customer can weaken the company in the event of default. In this logic, if the credit limit is reached, the resulting alert should encourage the company to renegotiate the payment terms to limit the risk.

Credit limit does not mean order limit. There are other means of payment than credit, such as cash payment before delivery, down payment on order, bank guarantee, international letter of credit... This is a matter of negotiation and customization of payment terms with the ultimate objective of securing sales. In addition, it is important to know that the terms of payment must appear in the general terms of sale as well as on the invoice for each transaction.

Corporate monitoring allows the daily monitoring of legal and economic information, the risk of default, late payment or non-payment of third parties. It is carried out by monitoring legal and financial events or weak signals related to the customer.

As events, can be considered the change of director, manager, modification of activity, decrease of share capital, filing of annual accounts, collective procedure, change of score, privileges...

This real-time monitoring identifies the risk to the creditworthiness of the customer portfolio. It reinforces risk management and is done :

• On the monitoring of public and private sources around IMR (Registrations - Modifications - Striking off), Insee, legal announcements, JAL and Bodacc, collective procedures, annual accounts, financial links, payment behaviors, unpaid or litigations, treasury or social security liens, press, web...
• By e-mail or in-mail alert (private messaging), and sometimes even by SMS,
• Via dashboards of business information platforms.

The arrival of events such as deregistration or judicial liquidation completes the surveillance activated on the third party since the company no longer legally exists.

The analysis of a company's performance compared to its sector of activity is an anchor point of the study of the environment; it is similar to an economic diagnosis with regard to an ecosystem.

In risk management, this sectoral comparative study is based on performance indicators and financial ratios on the following themes

• Growth in revenues and valuation,
• The evolution of the workforce, the size and age of the companies, the sector of activity,
• Changes in activity incorporating a level of capital productivity and investment intensity,
• The degree of internationalization,
• Payment behavior (DSO and DPO) compared to the industry average.

The purpose of this sectoral information, which is the result of a process of comparison and analysis, is to position the company in its ecosystem and to identify the weaknesses or strengths that distinguish it.

If the information on a company is insufficient or even absent, it is then necessary to carry out a specific survey.

Conducted by telephone with the director or financial manager based on specific questions, the survey provides much more than information from a database. It provides a snapshot of the financial situation for which all the data provided by the company has been verified. Complemented by other sources of information, the survey makes it possible to :

• Verify the legal data of the company and its managers,
• Evaluate the solvency, cash flow and activity of the company, even in the case of published accounts with the confidentiality option,
• Apprehend the quality of a company with an expert eye, while verifying its solvency and financial health through the most up-to-date information possible, such as key figures, order book, partners, bank relations, etc.

The purpose of this investigation is, in case of strong doubt, to obtain an updated situation of the company in order to detect possible difficulties to anticipate.

This approach applies equally to companies that export. Controlling customer risk, while seizing foreign market opportunities, requires first checking the country risk, as well as the solvency of the future commercial partner.

The notion of country risk is polymorphous. In its analysis, it covers various factors such as political, economic and social risks. This macro-economic knowledge aims to know and anticipate the business environment in each export country.

To secure business relationships, knowledge of the creditworthiness of a foreign company can be obtained by consulting financial information in international databases or by requesting investigations of the third party in question.

This human evaluation allows us to obtain reliable data enriched by proven investigation techniques. It aims at securing commercial transactions and important outstandings through the knowledge of its export customer.