Risky business: predictive analytics can give you the green light... or the red flag
Author: Michael Criss, Senior Product Manager Commercial Solutions, Equifax
Did predictive analytics flag the demise of this retailer?
If you’re a company looking to expand your offering, or a lender looking to extend credit to a new business, there’s a good chance the possibility of failure and external administration is lurking in the back of your mind.
Whilst there are many reasons for companies to go under, more often than not, those worst hit are businesses with poor risk management practices.
Access to predictive analytics for effective credit risk management is invaluable.
For businesses that extend credit, understanding a potential customer’s credit worthiness is key. It provides lenders with critical information, like a customer’s ability to repay their loan.
This is true in any industry, but take the retail trade, for instance.
In the digital age, retailers need to be doing everything in their power to reduce risk for a higher chance of success. Not only are retailers facing fierce competition at the traditional shopfront and from international labels setting up mega stores; they’re also under threat from online giants like Amazon and THE ICONIC, which have consumers expecting same free day delivery or free returns policies.
The warning signs before a company fails
One leading retailer, which opened its doors in Australia in 2014, did so with the objective that it was going to perform successfully, like it had done overseas. However, from a lackluster start to hitting rock bottom in December 2015, the warning signs of financial distress were evident from the beginning.
The credit report on this particular retailer showed that 12 months prior to its collapse, the company was showing a steady decline in invoice payment days Q1 2017 to Q3 2017.
Further to this, the credit report also showed that the company’s credit score went from nearly 500 to -100. The report indicated the business was at high risk of failing within the next 12 months, and this was certainly what happened.
Here’s where the credit report comes in
Credit reports contain key information to allow companies to make informed decisions around lending credit, or simply entering into a business arrangement. For example, is a business a good payer? Is it a good or bad credit risk? Does it have any legal or court actions pending, and how many credit enquiries have been made?
This data combined allows you to gather real insights into the viability of the company.
Don’t fall into the data trap
Equifax data reporting is extensive; as a company that has been collecting data in Australia and New Zealand for 50 years, we have the depth and breadth of data to provide highly accurate insights and predictive capability to help our customers make well informed decisions.
With Equifax, lenders are provided with the information that enables them to access and provide further understanding to the risk presented with each individual application.
So, if you are a lender and looking to provide a business loan but want to find out more about your potential customer, there are means to help you with your decision, such as premium scoring and analytics products, which use predicative qualities to provide a complete picture.