Trade Credit
22.5.2023

The critical role of credit scoring in Digital Trade Credit: Webinar highlights

Hokodo

We recently announced a series of webinars exploring the six key elements of an end-to-end Digital Trade Credit solution. In this blog post, we recap 5 key learnings from the first webinar, which explored the critical role of credit scoring.

Offering trade credit is an easy way for B2B companies to build customer loyalty and drive sales, but non-payment risk is always a concern—even more so when you consider the high average cost of goods and services in B2B. In the first in a series of six webinars on how B2B sellers can benefit from an end-to-end digital trade credit solution, Hokodo’s VP of Marketing Lucy Heavens was joined by Olivier Fradin, Hokodo’s Head of Credit, to discuss B2B credit risk and how to create a credit score for customers.

Here are five key learnings from the webinar.

1. What is credit risk and credit scoring?

When allowing customers to buy products or services with trade credit, companies need to consider whether or not a customer will pay their debt on time—this is known as their creditworthiness. A credit score is calculated to measure the scale of the risk of non-payment.

When it comes to digital trade credit, providers are most concerned about short-term credit risk, given the repayment periods will usually be no more than 30, 60 or 90 days. Sellers want to avoid offering credit to customers who have a bad record of paying on time, because it can be very damaging to a company’s cash flow management if they must wait months longer than expected for payment.

2. Why is B2B credit risk different than in B2C?

“B2B and B2C are different for several reasons,” says Olivier. First are the order sizes—B2B orders can run into many thousands of pounds, while in B2C the average transaction size is only around £100.

Secondly, there is usually more public information available about a company, such as its financials and other corporate filings, than there is about individuals. This means that credit providers can build a more detailed image of a company and therefore offer a more tailored payment experience.

However, some B2B sellers prefer not to extend credit to new customers right away, asking for up front payments for the first two or three orders while they build up a profile of that buyer.

3. What are the challenges of building your own credit scoring model?

Collecting data is one of the biggest challenges. Not all data is publicly available; some may need to be purchased from a third-party provider. And even when data is publicly available, if that customer has operations in multiple countries, it means having to collect information in every country. This data needs to be regularly updated because the creditworthiness of a company evolves overtime.

B2B sellers also have to decide what factors they care about when calibrating their credit scoring model—for example, is payment history more important than the age of a company? The model then calculates a score, and sellers can set a threshold for starting to extend credit based on their risk appetite.

4. What are the benefits of instant credit decision-making?

Real-time credit decisions will ultimately optimise the customer experience by making the B2B transaction process faster. Without instant decisioning, if a buyer is looking to purchase goods or services on credit, it may take hours or even days to gather the information needed to calculate a credit score and make an informed decision on whether to offer credit terms. If a B2B seller has access to a real-time credit decisioning engine like Hokodo’s, which accesses real time data from a range of sources, then it can eliminate any waiting time and help increase sales conversions. 

5. How does Hokodo’s tech simplify credit scoring?

Hokodo combines information from public and third-party sources with in-house data such as current exposure to a buyer and any previous payment experience in order to form a credit score. Optionally, merchants can provide additional information they might hold on buyers, while buyers can give Hokodo access to their open banking data.

With all this data, Hokodo can then compute a highly accurate probability of default and set a credit limit based on the size of the company and their credit score. Underwriting rules also ensure that if a buyer is in arrears, then they can’t access additional credit until the debt is repaid. “Having this solution available in real time will free up a lot of time for a merchant,” says Fradin.

To learn more about credit scoring, watch the full webinar here.

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