Dynamic business: checks protect vital cash flow

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Keith McLaughlin: “Arrears are mounting and you don’t want to be used as a free bank.” Photo / Provided

Businesses have faced two years of uncertainty since Covid-19 hit and it has become increasingly important to know who they are dealing with. A credit check makes sense.

Keith McLaughlin, managing director of credit bureau Centrix, says a crucial part of business sustainability is protecting cash flow and ensuring customer and supplier reliability.

“Small and medium business owners need as much certainty as possible when it comes to partnerships with customers and suppliers, both short and long term. Will they be able to honor agreed payment terms?”

The latest Centrix analyst report found that small business credit ratings or ratings across all sectors have fallen over the past year. McLaughlin says there were variations in default risk – with higher levels of defaults in the rental/real estate, transport, retail and construction sectors, and lower defaults for information services, education and the arts, and professional services.

“A simple and cost-effective way to assess the risk of non-payment is to check the creditworthiness of potential partners,” McLaughlin says. “Understanding their credit score, debt level, defaults, repayment behavior, and any other financial red flags can help business owners make informed credit and lending decisions.

“Performing credit checks can help establish appropriate business terms for each new customer. Credit checks on potential suppliers can also help secure the supply chain and reduce operational risk.”

McLaughlin says if the credit check shows the customer is paying on time, that gives the business some degree of confidence. But if the check shows a tendency to pay after 65, 80, or 90 days, that late payment can strangle a business’ cash flow.

“Arrears are mounting and you don’t want to be used as a free bank. Things aren’t quite the same as before.

“If a company had bad debt or a series of bad debtors, it could go into debt to get through the rough patch. But that’s harder to do now.”

A credit check showing a low score with a high risk of default means a business can negotiate favorable payment terms that require prepayment or cash on delivery, McLaughlin says.

Centrix, based in Auckland with 30 employees, is one of four consumer and business credit bureaus in the country.

For the past 13 years, Centrix has collected, analyzed and aggregated the financial situation of every consumer in New Zealand over the age of 18, receiving monthly data from 71 customers, including all banks, telecom operators and electricity, water and gas suppliers. .

Credit reports are scored between one (very high risk) and 1000 (very low risk) and disclose all credit defaults, district court judgments and insolvencies/debt repayment orders.

A score of over 892 is considered excellent – representing 20% ​​of New Zealand’s population – and Centrix suggests “you should be eligible for the best credit cards, loans and utilities (but there are no guarantees)”.

A score of 496-705, involving 20% ​​of the population, is deemed acceptable and additional conditions will be attached to credit cards, loans and utilities.

Ten percent of the population is classified between 1 and 495 or classified as poor, and Centrix states in the report: “You are more likely to be rejected for most credit cards, loans and public services”.

McLaughlin says people are managing credit better than they were three years ago and lenders are more responsible.

“We have more information and we can pass it on to lenders who can make more informed decisions.”

Centrix has added business reporting to its consumer credit services over the past six months, and that side of the business is growing. “There is more demand and awareness in the market for credit checks,” McLaughlin says.

“Companies are even doing checks on themselves. They can go to a bank to get a loan and they want to be happy with what they see on their credit history. It makes life easier in these times of responsible lending. and New Credit Agreements and Consumer Finance Act (CCCFA).

“The act requiring more disclosure has put more stress on the loan market.

“There’s a much greater obligation for lenders to make sure borrowers can meet repayments. Before, lenders could rely on information provided by borrowers. Flexibility has been removed,” McLaughlin said.

Among the prescriptive regulations, lenders must review a borrower’s financial situation in great detail, including the criteria for estimating and verifying a borrower’s income and expenses.

The regulations, which came into force on December 1, were quickly criticized for their complexity and creating significant uncertainty for lenders.

The government is currently examining the unintended consequences of the law.
McLaughlin says the year started with weaker consumer credit demand overall, down 14% year-on-year.

A combination of weakening consumer and business confidence, rising interest rates and changes to the CCCFA are having an impact.

The proportion of mortgage applications successfully converted into new home loans fell from 39% in October to 27%, a drop of almost a third.

McLaughlin says “we are also seeing this impact on other consumer credit products, including credit cards, auto financing and personal loans.

“Successful loan conversions went from 35% in October to 25% in January.”

In its January Outlook report, Centrix posed the question: Are we facing the next big credit crunch?

Small business credit demand rose 9% year-on-year – with the construction sector remaining buoyant – but the average score for new credit applications fell to its lowest average since June last year.

“While demand is high, credit ratings for construction and small and medium-sized businesses have deteriorated. The sector is experiencing significant labor and supply chain shortages.

“Similarly, the tourism industry still faces challenges with closed borders and uncertainty surrounding international travel. While retail spending has recovered from the lockdown, supply chain issues remain, resulting in inventory delays and price pressure,” McLaughlin said.

“Arrears levels are expected to rise in the first part of this year, consistent with past seasonal trends as consumer cash flows tighten after the holiday season.”

McLaughlin says the credit dynamic has changed. A business credit report will give a good overview of the risk involved in partnering with customers and suppliers. It’s as simple as the higher their credit score, the lower the risk of them not making a payment on time.

Businesses with high credit scores are 15 times more likely to pay their bills on time than those with low credit scores.

“With this information, business owners can protect their cash flow by only extending credit to businesses that are likely to pay on time or by dealing with reliable suppliers,” McLaughlin said.

• Centrix is ​​a sponsor of the Dynamic Business report

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