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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Our latest innovation gives those in charge of working capital finance access to a range of market-leading features.  This provides more control, saves time and increases security. With Aronova Live! you have:

• immediate assessment of invoice and supplier eligibility
• access to instant decisions on acceptance into a funding programme for buyers/sellers
• real-time processing of seller/buyer invoice data and eligibility
• improved cash flow and optimised working capital positions
• rapid access to collections and credit control analysis which frees capacity more quickly
• full automation of processes, reducing operational risk

Ben Grant, Head of Partnerships, explains how Aronova Live! has been developed and tested with our global partners:

“We have a team of developers dedicated to continual innovation based on our global network of funding providers, banks, institutional investors, insurers and corporates. We know that those responsible for receivables programmes struggle with the risk, inefficiency and added cost of manual processes. Aronova Live! was developed in response to these issues and we know that those now using it have seen their operations benefit substantially.”

Instant decisions and reduced fraud

Aronova Live! works by establishing a secure API connection between the data sources. This enables the near instant communication of changes (new records, changed records, closed records) to accounts receivable, accounts payable and credit collection data. In addition, other asset classes that can be expressed as an invoice such as portfolios of corporate loans, leases, credit cards can also be included in the data flow.

This makes it possible to calculate global debtor credit limits, assess invoice eligibility and process invoice purchases live and on demand. While not everyone requires this, we know that for some the ability to calculate availability or sell an invoice within minutes of processing is a major benefit. And it’s not just improved efficiency, the technology also reduces fraud risk.

The API creates an uninterrupted flow of information directly from the originating invoice platform or accounting package. With no manual intervention, data manipulation is less likely, resulting in improved programme security and better data integrity.  Automation also takes some of the legwork out of Know Your Customer and anti-money laundering verification.

The importance of digitisation

The trend towards digitisation of trade receivables during the pandemic has accelerated as remote working has made paper-based processes even less viable, and injected urgency into financial service providers’ previously slow-burning digital initiatives. As a result, digital financing flows multiplied across the entire financial services industry during 2020, helping working capital finance platforms reach a critical mass of user and transaction numbers.

We know that real-time technology will become the norm in the years ahead, but we’re pleased to be able to offer this facility long before many others have even started to automate their manual processes. 

You can learn more about AronovaLive! here or contact us for more information.

The post AronovaLive! – real-time control of working capital finance appeared first on Aronova.