Are automated debtor credit limits sufficiently reliable for use in trade credit insurance and trade finance environments?

We hear a lot about “AI” and “Turning Data into Knowledge.” However, do these advances realistically have a place in debtor credit limit management and should insurers or funders rely on them?

From our experience, I’d say the answer is a qualified yes.  Data, of course, is key, and a seller’s trading experience in isolation isn’t enough to set reliable debtor credit limits.  After all, trading experience alone doesn’t tell you if a debtor is or becomes insolvent and invoice data doesn’t tell you what a debtor does or how long it’s been in business. 

We’ve found that a tranched approach often produces the most reliable results; automatically set smaller debtor credit limits using a combination of seller trading experience and basic firmographic data such as debtor activity, age and current operating status.  For higher value credit limits, enhance the data with risk scores and probability of default, then for the largest or most challenging credit limits, add a manually review capability.

Some of our insurance partners issue non-cancellable debtor credit limits, which become more difficult to manage when based on a seller’s invoice data.  Live trading experience is great for giving early warning signs of changing payment patterns, but how derogatory must that experience become before a debtor credit limit can be cancelled?

Across our trade credit insurance and trade finance products we are setting hundreds of thousands of automated global debtor credit limits, predominantly using a combination of credit agency firmographic data and the payment experience of one or more sellers trading with the subject debtor.  They allow credit limit decisions to be made on every debtor in a portfolio-wide insurance or funding program and can remove the uncertainty often associated with discretionary cover.

But to maintain acceptable loss ratios, automated limits need to be used conditionally and in combination with the backing of a manual credit risk analysis capability. 

Ready to learn more?

Contact us to find out more, and talk to a member of the Aronova team.

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Over the next five years, financial institutions have a unique opportunity to capitalise on the rising demand for receivables finance. Let’s first look at the evidence for this trend before exploring how institutions can maximise the opportunity.

The global economy

According to the International Monetary Fund, global growth will be “stable but underwhelming” in 2025 – and hit a “mediocre” 3.1 percent over the next five years. Regionally, the IMF anticipates growth downgrades for the Middle East, Central Asia and sub-Saharan Africa, driven by oil conflicts, civil unrest and extreme weather events. The US is expected to fare better but European markets are also likely to see revised forecasts on the downside. On the other hand, China and India, thanks to surging demand for semiconductors and electronics, are predicted to perform well.

So, what does this picture of global GDP imbalance and geopolitical instability mean for business funding going into the New Year? Possibly very little, if recent rather optimistic forecasts, are anything to go by.

Ongoing global instability won’t dampening appetite for growth

Findings by EY ITEM Club suggest that bank-to-business lending in the UK is on course to grow by 3.1 percent in 2024, and then 5.6 percent in 2025 and 6.2 percent in 2026. The important point is that companies’ appetite for borrowing is set to increase as capital costs decrease.

Private equity firms’ confidence in deal making in the year ahead is surging, according to a survey by Deutsche Numis, which found that 84 percent of respondents expected to complete five to 10 deals next year. That’s significantly up from 2023, when just 12 percent of private equity firms surveyed said they were “highly likely” to execute bolt-on acquisitions to portfolio companies.

Experts tentatively predicted this renewed confidence at the beginning of the year. Quoted in a Euromoney article, HSBC’s head of global trade and receivables finance Vivek Ramachandran said falling cost of credit, linked to falling reference rates, would “hopefully provide a little bit of impetus for companies to embark on new economic activity or expansion.” And rates have fallen, albeit gradually, in the UK, the US, the eurozone and China. Indeed, there have been recent rate cuts by central banks responsible for seven of the top 10 most traded currencies.

Do financial institutions have the tools to meet the rise in lending demand?

Unforeseen events aside, it would appear that 2025 is going to see a marked uptick in demand for trade and receivables finance, as part of a wider business investment trend. The question financial institutions need to ask themselves is, do we have the operational capacity and tools to meet the growing need for short-term borrowing?

It’s certainly the case that many small to medium-sized commercial banks and asset managers find it challenging to offer trade and receivables finance to corporate clients. This is because these financial institutions are without the necessary operational infrastructure. We wrote about this in more detail back in July 2024 – see our blog here. As for larger lenders, while they undoubtedly have the capacity to meet renewed growth in business funding, they might still face difficulties caused by legacy platforms that slow decision making and require time-consuming manual inputs.

Thankfully, Aronova can support all sizes of banks and asset managers with their short-term business lending strategies, providing they require a revolving working capital facility of at least $10m. Our cloud-based platform allows banks and asset managers to outsource the day-to-day management of receivables purchase programmes, with functionality covering seller data collection, invoice eligibility, invoice sale and the calculation of seller cash settlements. We’re also tackling white-collar fraud through advanced monitoring tools and are enabling portfolio-wide automation of global debtor credit limits.

By transferring the above operations to Aronova, businesses can spend more time building their working capital portfolios. And with many experts predicting a renaissance in corporate investment and borrowing in 2025, financial institutions must have the ability to seize the opportunity for growth.  

Ready to learn more?

Contact us to find out more, and talk to a member of the Aronova team.

Sources:
IMF – Global growth is expected to remain stable but underwhelming
Bank lending to business set to grow by 2.6%
BCC economic forecast
Private equity firms’ confidence in dealmaking surges, survey shows
Trade finance survey: Outlook hangs on rate cuts by year end

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Moving swiftly through the analysis and due diligence of a funding opportunity is key to maintaining deal momentum, and ultimately converting an opportunity into a live working capital program.

This process can be particularly challenging for portfolio-style receivables programs, where it’s important to understand the makeup of an entire debtor portfolio and not just focus on the top “x” or larger debtors.

Data plays an important role in this process, but there’s often a fine line between how much information you ask a seller to provide versus what the seller can provide relatively easily. We’ve probably all encountered situations where the seller can’t easily provide what we’re asking, becomes disinterested, and ultimately switches off.

Over the last 15 or so years, we’ve seen a significant change to corporate attitudes regarding data sharing, and until relatively recently, most mid-cap corporates were very reluctant to share their receivables data. I make the deliberate distinction between a mid-cap and an SME, as banks and insurers were often able to put greater pressure on an SME to share its data or else risk not getting their funding or insurance program.

Mid-cap and larger corporates increasingly understand the arbitrage between sharing their precious receivables data and achieving the working capital or insurance program they need. Technology is also helping this process, and the reliability of automated data connectors, coupled with their ease of implementation, can be a game-changer if positioned properly. Not only do these automate the process of collecting and transferring detailed receivables data, but in the eyes of the corporate, they also outsource the often onerous responsibility and compliance elements of accurate data provision.

Data connectors and our automated PASS reports give us the ability to reliably shorten the triage and due diligence processes, maintaining deal momentum, providing a competitive advantage, and hopefully improving conversion rates.

Ready to learn more?

Contact us and find out how our solutions are helping financial institutions to overcome barriers and offering new products and services.

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