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AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET ABOUT CREDIT MANAGEMENT

18 FEBRUARY 2008 CREDITMANAGEMENT Combating the crunch: keeping business in business

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IntroductionCREDIT MANAGEMENT

Whether the credit crunch isreality or myth, there is no doubtthat finance to support business isbecoming less readily available. Asa consequence, pressure oncashflow is building, and the roleof the professional credit managerin keeping the cash flowing isbecoming more critical than ever.

Credit management can be definedsimply as the policies and practicesbusinesses follow in collecting pay-ments from their customers. Thecredit manager is the individualtasked with setting these processesand ensuring they are effectively im-plemented. Modern credit managersdo much more than this of course.They pro-actively and positivelyinput to many departments, functionsand procedures to improve businessflow and customer service, as well asfocusing on their main role of pro-tecting their organisation’s invest-ment in debtors and recovering debt.

Their remit of course varies fromorganisation to organisation, and in-

‘fundamentals’ that become more im-portant than ever.

Credit managers may be assessingrisk on new accounts and existing cus-tomers by way of credit informationproviders, reading financial accountsand establishing trading histories; theymay be involved in the creation, main-tenance and management of a fullcredit policy - internal documents thatidentify all set and agreed proceduresand policies that govern the creditfunction. They may also be negotiatingand agreeing terms of business withnew and existing customers, includingpayment terms and setting up servicelevel agreements and credit limits, andreporting to direc-tors on age and pro-file of debt, potentialrisks of bad debt,overtrading ac-counts, areas of sug-gested training andgeneral customerservice observations.They are also likelyto be overseeing ormonitoring the ac-tivities of tracingagents, debt collec-tion agencies, solici-tors, insolvencypractitioners and other third parties.

As well as their direct ‘financial’ responsibilities, they are typically taskedwith identifying system or software im-provements and playing a key role intheir implementation, documentationand the training of those who will be af-fected. They also, of course, not untyp-ically have a wider ‘management’ role,responsible for motivating, coachingand setting targets for the credit team,usually collection targets, debtor day re-duction targets, unallocated cash reduc-tion targets and ongoing desk side

coaching to get the best out of each calland account contact.

Far from being a ‘back-office’ func-tion of the Old School, credit managerstoday need to have what the recruitmentcompanies might describe as “superior”communication and persuasion skills,being able to converse in any kind ofenvironment with the strongest level ofcommercial awareness.

So from one perspective, perhaps,a credit manager prevents businessfailure by ensuring adequate cashflow within a business; looking at itmore positively, good credit man-agement is not just about minimis-ing bad debts, but rather maximising

sales, making opti-mum use of newtechnology, prod-ucts and servicesthat are there to as-sist.

Credit managersfrom all over the UKand further afield willbe gathering at icm08on 6th March to sharetheir experiences andconsider the latesttechniques and adviceavailable to help themthrough what is un-

doubtedly going to be a challengingtime ahead. The Institute itself will belooking at how it can work more closelywith its peers in business and in gov-ernment to devise initiatives to supportits members and the wider profession.

The credit crunch presents one of thegreatest challenges to our profession inrecent times. It also presents one of thegreatest opportunities to demonstratehow one of the most under-rated andunder-valued professionals in a busi-ness can in fact be vital to your futurecorporate wellbeing.

Crunch time for business

CONTENTS

Asset based finance 4

Enforcement 5

Credit insurance 6

Capitalising on the crunch 8

Debt collection 9

Commercialcredit scoring 10

Integrating risk 12

Late payment 13

Debt sale and purchase 14

CREDIT MANAGEMENTA TITLE FROM MEDIAPLANET

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Reducing the risk of doing business

BY PHILIP KING, DIRECTOR GENERAL OFTHE INSTITUTE OF CREDIT MANAGEMENT

dustry to industry, but is increasinglybecoming much more strategic, giventhat large organisations are known tohave strategies for either non-pay-ment to help their own bottom lineprofit, or at least significantly delay-ing payment causing the supplier tofinance them at no cost.

At its most fundamental, a creditmanager will oversee the Sales Ledgerfunction, including raising invoices ina timely and accurate manner, speedycash posting and accurate allocation ofthat cash, agreeing invoice formatswith larger customers, and ensuringsales teams are capturing data accu-rately to prevent subsequent invoicequeries. In times of crisis, it is these

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Asset based financeCREDIT MANAGEMENT

The recent turbulence in the financiallending markets will also add to theattractiveness of asset based finance.The sub-prime mortgage crisis hashad a massive impact on banks’ atti-tude to risk and we’ve seen tightenedborrowing conditions as a result.Subsequently, companies that use tra-ditional forms of finance are feelingnervous about sources of future fund-ing, examining their balance sheetsmore closely to determine how theycan leverage their assets.

Many companies could take a leafout of the books of large corporates,which increased their appetite forasset based finance when the impactof the credit crunch became apparent.

In the third quarter of 2007, statisticsfrom the Asset Based Finance Associ-ation (ABFA) revealed that companieswith a turnover greater than £1bnhad been advanced £3.2bn by ABFAmembers. This figure increased by£456m in one quarter alone, as agreater number of large corporatesuse asset based finance to help fi-nance M&As, as private equity andother forms of debt appear increas-ingly difficult to secure.

In terms of SME activity, recent re-ports have shown that there has beenan increase in bad debts and smallbusinesses are owed £18.6bn in out-standing payments, with the averageamount owed to a small business

With the opportunity to add securitythrough instant funding, outsourcedcredit management and credit protec-tion against customer bad debts, any

sensible business person needs to con-sider all their options.”

Further evidence of the viability ofthe asset based finance product is theannouncement by Moody’s Investor

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2008 – theyear of assetbased finance

Services that they have reviewed theirABL ratings. Moody’s has acknowl-

edged that their current approachto rating ABL’s does not fully recog-

nise the benefits of a typical ABLstructure. The revised ratings willdemonstrate the favourable recoveryexperience of asset-based loans andshow that closely monitored ABL dealsexperience lower losses in default orbankruptcy than other types of seniorsecured first-lien loans. This is welcomenews for the UK and reinforces theworth and applicability of asset basedlending as a mainstream funding solu-tion.

In terms of future developments,the USA has seen the launch of TheReceivables Exchange (TRE), the firstcentralised electronic marketplace forcommercial receivables. This onlinemarketplace for real-time trading ofaccounts receivable is being reportedas a smart, easy and efficient way forcompanies to gain quick access toworking capital at a lower cost thanother financing options.

The founders of TRE plan to edu-cate SMEs on the benefits of receiv-ables financing, which is somethingthe UK needs to follow. Some compa-nies still remain unaware of theseservices. We need to communicate thebenefits, at the same time dispellingany myths associated with them.

The future of the asset based fi-nance industry looks extremely posi-tive and set to grow. Trends report ayear on year growth in the financeproducts, with invoice finance grow-ing from a £76bn turnover in 2000 to£173bn turnover in 2006. The indus-try will definitely be an interestingone to watch.

Over 48,000 UK companies currently use a formof asset based finance, such as asset based lending(ABL), invoice discounting and factoring, to fundtheir business. This figure looks set to increase in2008 and beyond, thanks to the flexibility of theproducts, its suitability for most business and thenew adaptations being introduced.

standing at £30,000. This shows theimportance of having an effectivecredit management system in place.With companies trying to extend pay-ment terms, the credit managementrole will be increasingly importantand may lead to companies outsourc-ing this facility to factoring. Havingtighter control of the company bal-ance sheet and debtor schedule is par-ticularly important in today’s fragileeconomic climate.

Tim Corbett, managing director ofFortis Commercial Finance, agrees: hesays: “On opening a newspaper orswitching on the TV any business per-son cannot fail to see the latest on theso called ‘credit crunch’. Even in abuoyant economy it is essential that allcompanies have a good understandingand control of their cash flow and intoday’s market this is doubly impor-tant. This is where invoice finance canprovide support and mean the differ-ence between survival and insolvency.

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Enforcement CREDIT MANAGEMENT

Claire Sandbrook, chief executive ofShergroup, says the debt crisis is set toget worse, and her advice if you are infinancial trouble is to seek help imme-diately from organisations such as theCitizens Advice Bureau.

According to Government statis-tics, almost one per cent of the UK’sadult working population have beenmade bankrupt since the turn of themillennium.

Mrs Sandbrook says: “It’s not justpeople on modest incomes that fall intodebt. People with much higher earningcapacity can and will find themselveson the receiving end of enforcement

action.” She adds: “Shergroup spe-cialises in collecting business-to-business debts owed to its clients, butincreasingly we are seeing more andmore debt from the consumer sector.

“When the debtor is based at homeit is often going to be the family car,or the plasma TV which is subject toenforcement action. Any item seizedcan be sold at auction to pay off thedebt if a solution on payment cannotbe found.”

High Court Enforcement officers(HCEOs), often referred to as ‘superbailiffs’ are strictly regulated and allknow that should they step out of linethey could find themselves in front ofa High Court Judge and risk losingtheir licence.

But regulation is not uniform acrossthe board and while County Court andCertificated Bailiffs are appointed by aDistrict Judge, not all private bailifffirms act with a certificate to confirmthey have reached the necessary levelof understanding of the rules on en-

forcement. Debtors therefore need tounderstand their legal position.

Mrs Sandbrook says: “We desper-ately need a level playing field forALL bailiffs in terms of compliance

With a decade’s spendthrift culture severelycurtailed thanks to the current credit crunch atop debt expert at the UK’s largest High CourtEnforcement agency, Shergroup, is warningpeople not to ignore their rising bills.

BY ROB BEDDINGTON

and standards. Bailiff companies needto raise their game and I’d like to seeDistrict Judges refusing to certifythose that cannot reach the requiredstandard of competence.”

“The public need to be given clearassurances that the people who areknocking on their front door havebeen in front of the judge and havesatisfied the Court that they are re-sponsible people who are willing to bescrutinised in how they operate.”

The Tribunals Courts and Enforce-ment Act will address the regulationof all private-sector bailiffs and intime will give new powers to forceentry to residential premises in spe-cial circumstances and with prior ju-dicial approval, once full independentregulation of all private-sector bailiffshas been implemented.

The Powers of Entry Bill, which iscurrently being debated will set outthe criteria about what sorts of cir-cumstances could give rise to thiscourse of action.

But well before creditors reach forenforcement help, Mrs Sandbrook’sadvice is simple: “Find out as muchas you can about your debtors beforegiving credit. What and where aretheir assets, and above all, do theyhave the ability to pay?.”� Claire Sandbrook

“Wedesperately needa level playingfield for ALLbailiffs ..”

Debts set to rise,warns expert


Credit insuranceCREDIT MANAGEMENT

Credit insurance in 2008 Credit Insurance has been around well over 100years. Offering protection to the seller againstthe default or insolvency of the buyer or - ininternational sales - protecting against a foreigngovernment blocking transfers or cancellingorders, it offers prudent sellers a safe way ofincreasing sales which were otherwise too risky.But it’s not a recipe to sell and forget!

The credit insurance market has seenmany developments lately. One in-surer, Euler Hermes, now offers land-lords protection against tenant default,also covering a six-month re-lettingperiod. Other issues, such as the max-imum value of claims payable in oneyear, have also been addressed. Therealso appears to be greater convergencebetween risks covered and the offer-ings available from each provider.

Discussions with brokers indicatepremium rates are currently very low,and against the hardening financingmarket, with resultant increasing in-solvency levels Andrew Neill, directorof Newstead Inter-national, believes”there will in-evitably be a hard-ening of premiumrates in 2008.”

A recent surveyby Euler Hermes offinance directors inover 300 companiesprovides furtherweight to the viewthat the full ramifi-cations of the current credit crunch onthe performance of UK corporates hasnot yet been fully realised - and thatfinancial conditions are likely to dete-riorate still further. “Financial indica-tors are starting to show what has forsome time been suspected,” says Fab-rice Desnos, CEO of Euler Hermes UKPLC, adding, “We are now forecastingan 8.3 per cent increase in insolven-cies in the UK market in 2008. This is

the real business fallout from the creditcrisis and will affect the wider UKeconomy.”

The British Exporters Association(BExA) published a straightforwardGuide to Export Credit Insurance in Oc-tober 2007, to aid UK exporters to nav-igate the pitfalls and benefits associatedwith holding a policy. This is availableat www.bexa.co.uk free of charge.

Cover still splits between domesticcover, insuring UK sales, and thoseselling internationally. Many smallerinsurers do not protect overseas sales,but increasingly sales to OECD marketsare seen as an extension to the home

market. Interestingly,insurers cover politi-cal acts by EU gov-ernments but not thatof the UK! Given re-cent examples of UKpublic sector bodiescancelling contracts,this seems unfair.

The differentiationat the top end re-mains, with the bigthree whole turnover

insurers, Atradius, Euler Hermes andCoface, continuing to offer a creditlimit writing service as the basis of thepolicy. There is increasing flexibility,with discretionary limits being moregenerous to experienced clients.

On the other hand, the ethos of un-derwriting the credit process policy byAIG and ACE offers larger companiessurety without interfering in their de-cision making process. Complement-

ing this, AIG now has a credit limitand automated reporting process en-suring better risk management forboth insured and insurer, and earlyhighlighting of problematic accounts.Mark Moran, corporate manager TradeCredit at AIG, commented: “We haveinvested heavily in automated solu-tions to extract the maximum benefitfrom clients’ data systems to the ben-efit of all. We put the systems in placeto help the client, not rely on them toprovide the information.”

Alternative bad debt protection is

available with the banks. Throughtheir invoice discounting or factoringsubsidiaries, institutions such as For-tis and RBS provide a non-recourseinvoice discounting product whichcovers buyers up to an agreed creditlimit in the event of the failure of thebuyer to pay. Tim Corbett, managingdirector Fortis Commercial FinanceUK, advised: “Not only can we pro-vide 100 per cent credit protection butalso linked working capital fundinggiving an added degree of comfort”.

At the SME level, there are a num-

ber of smaller specialist insurers pro-viding useful policies. The threewhole turnover insurers continue totarget the small company with a di-rect sales product, while larger or-ganisations tend to use brokers. Creditinsurance and the disciplines it pro-motes can be of particular benefit tothe smaller company who may nothave either specialist credit collectionstaff or the ability to credit assesstheir customers.

Over the years, sellers complainedthat they obtain a buyer limit, only tohave it cancelled shortly after. AmlinCredit has been aware of this issue forthe last decade. While its focus is theUK and Ireland, it covers both domesticand overseas debts, with particular ex-pertise in construction, metals, engi-neering, paper and printing, traditionallydifficult risks. Specialisation builds mar-ket understanding and offers clients agreater capacity to underwrite buyerrisk. Ray Massey, risk director at AmlinCredit, said: “Our approach has alwaysbeen one of stability.

It’s the same underwriter quoting forbusiness as managing servicing andrenewing. This gives our clients cer-tainty and a growing long term rela-tionship.”

The next 12 to 24 months lookschallenging for everyone. Clearly,credit insurers face increased demandand increasing claims. As bank creditbecomes more difficult to access, thedemand from buyers to increase com-mercial credit from suppliers will in-crease, just when the risk isheightened. Credit insurance will aidthose sellers to keep providing thatnecessary credit. As the Chinese say,interesting times ...

Glyn Powell is a fellow of the Institute ofCredit Management and Member of theInstitute of Export. Currently, seniortrade finance manager at FairfaxGerrard Group, he writes and lectureson credit and risk issues and contributedto Gower’s Credit ManagementHandbook and Tolley’s Effective CreditManagement.

“The next 12to 24 months

will bechallenging for

everyone”

BY GLYNN POWELL

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Captilising on the crunchCREDIT MANAGEMENT

CREDIT PROFESSIONALS – IT’S TIMETO TAKE ADVANTAGE OF THECREDIT CRUNCHThe impact of the “credit crunch”brings the role of the creditmanagement function into focus,says independent consulting firmBusiness Change Partners Ltd. Itis therefore opportune that thecredit industry is meeting aticm08 in London’s ExCeL nextmonth, when credit managementwill put a stake in the ground for “professionalrecognition” alongside other business functions.

Recent economic developments demonstrate that credit professionals mustdo more than just drive down aged, bad or doubtful debt and improve Days’Sales Outstanding (DSO: the average time it takes a customer to pay theirbills). They must learn new skills. The current and predicted restrictions inavailable financing from banks means businesses are seeking alternativesources of funding, underlined by requests for higher credit limits and ex-tended payment terms from business customers. Credit managers need tounderstand the strategies and variables at their disposal to ensure that theirbusiness does not become a cheap alternative source of finance, instead in-creasing contribution to the bottom line.

Indeed, credit professionals can take advantage of this increase in de-mand for credit and use it to add value to their business, balancing the riskof these increased requests for credit and extended payment terms, with thereward of increased margin and return; not something that the credit roletraditionally entails.

Progressive credit management organisations/functions are already takingadvantage of these strategies by working with marketing, sales and finance tomitigate risk, at the same time increasing rewards. If credit practitioners wantto pursue the same “professional” status as their finance peers they must thinkoutside the debt and DSO reduction box and think more about the manage-ment of debt, balancing risk and re-ward, and developing strategiesto say “‘yes”’ to requests forincreased credit.

BY CHRIS SANDERS, FOUNDING PARTNER ANDDIRECTOR, BUSINESS CHANGE PARTNERS LTD

BY ROB BEDDINGTON

Wage bills have increased over theyears, and margins for collectionagencies became tighter as competi-tion becomes tougher. The industryhad to change with the times.

In the burgeoning consumer creditsector, predictive diallers and work-flow software came into play to max-imise efficiency and effectiveness,helping in-house collectors and agen-cies manage their activity. However,these processes still involved signifi-cant human interaction.

In recent years, technology hasmoved on immeasurably, and today wesee a host of interactive and electronicsolutions available to credit depart-ments, collection agencies and debt pur-chasers. SMS text messaging and email

Collection technology – a question of service

communications play their part for no-tification alerts, such as a confirmationthat a payment has been applied, al-though as part of the collections processitself, these rely heavily on a positive re-sponse from the debtor.

Intelligent voice messaging (IVM)goes one stage further, improving col-lection results in one action alone,and this technology is slowly beingembraced by the consumer credit in-dustry as one of the ‘must have’ solu-tions to their contact armoury.

The average customer may thinkthat the credit industry is adoptingthese innovative strategies with thesole emphasis of cutting personnelcosts and improving collection rates.Although financial considerations

and a swift return on any IT invest-ment are naturally the key driver toany such decision, these processeshave brought added benefits, and notonly to the creditor.

For example, independent researchcommissioned by IVM specialist Talk-ingTech says that 86 per cent of peo-ple contacted about their outstandingdebt prefer to be contacted by inter-active voice messaging than by a per-son or a letter.

The survey reveals that people pre-fer dealing with an automated voicebecause they avoid any embarrass-ment or potentially awkward con-frontation with a call centre operator.As a result, two thirds of the respon-dents interacted with the messagethey received, resulting in a success-ful conclusion.

David Clapham, UK country man-ager of TalkingTech says: “These find-ings, coupled with the fact that 96 percent of the companies surveyed foundthat getting in touch with customerswas their biggest challenge, meansthat the case for IVM is strong.”

Guy Cooper, technical director ofmessaging provider Qire, agrees,adding that the use of IVM technol-ogy has resulted in dialogue with atleast 20 per cent of customers notpreviously contactable, and that halfof these customers agreed to imple-ment payment plans. Even more en-couraging is that payments from themajority of these customers have con-tinued on the agreed basis well intothe plan.

There are still some challengesahead. David Clapham concludes: “Thefuture of IVM technology lies in itsability to emulate as accurately as pos-sible human-to-human contact: notonly must it have the ability to inter-act with the customer, but it must alsointuitively know how to respond.”

Taking a step back in time, collecting overduedebt was always a very labour intensive process,with many collectors concentrating on makingthe call or, even worse for the creditor, makingunanswered calls.

� Chris Sanders


Debt collection CREDIT MANAGEMENT

Six months ago the CSA concluded acomprehensive survey of businessactivity, trends and data supplied byits 300 members to ascertain the sizeand volume of the collections mar-ket. The amount of debt passed todebt collection agencies for recoveryhas more than trebled in the last sixyears to £21 billion. CSA membersnow handle more than 20 millioncases, up from 17 million cases twoyears ago. Nearly one million(885,063) of those cases involvedtracing, highlighting the increasingproblem of ‘gone-aways’.

In terms of trends, the majority ofCSA members believe that the mar-ket will continue to grow, and thatlenders are contacting debtors at amuch earlier stage in their delin-quency in order to resolve issuesmore speedily.

The mounting debt crisis does notsimply affect businesses but alsothose organisations working withthe public sector. Indeed within theCSA’s new Debt Manifesto - whichfocuses on the need for a greaterbalance between regulation and in-dividual responsibility - it statesclearly that the public sector is find-ing it increasingly more difficult tocontain and collect its rising debt,and as a consequence more govern-ment agencies are resorting to ex-ternal collection.

This supposition is supported by thefacts: the Department of Work & Pen-

All around there are media reports about themounting debt crisis, a crisis giving greaterimpetus still by talk of the credit crunch andimpending doom on the High Street. The malaiseis also hitting businesses hard, and making analready precarious position more difficult still.

LRCLegal Recoveries & Collections Ltd

on costs. It is in effect paying for thesame ‘service’ twice – and wouldmean admitting that their own col-lections team has ‘failed’.

“It is not a question of failure,”says Phil Mercer, managing directorof Euler Hermes Collections. “We allhave customers that delay or refuse topay on time. Using a DCA to collectthese debts allows a clients’ own in-house credit control teams to devotetheir time to collecting the majorityof their sales ledger, leaving the re-luctant payers to the expertise and re-source available from a specialistDCA.

“The strength of a third party DCAcan have a powerful impact on settle-ment of the more difficult debts thatare seriously overdue. We provide aterms and conditions of trade reviewservice which can mean that theDCA’s costs are repaid by the debtorshould the client have a right to claimthese,” he adds.

Colin Thomas, managing directorof STA Graydon says part of the dif-ficulty is that businesses often fail torecognise they have a problem in thefirst place: “Some think that we onlydo what they do, and therefore theycannot justify an additional cost,even though third-party interventionis often enough to recover a debt.Some simply go straight to litigation.They fail to realise that overdue ac-count data can significantly impact acompany’s credit rating.”

Unlike practically any other in-dustry, agencies are only paid on re-sults. No win no fee is pretty muchaccepted as the industry standard.Clients, therefore, have quite liter-ally nothing to lose and everythingto gain.

Increasingly, credit managers aremeasured on what are called DSOs(Days Sales Outstanding); most willhave a specific DSO number that hasbeen reached, and their performance– and often their reward – is based onachieving this figure. Far from indi-cating ‘failure’, the market for debtcollection continues to grow becauseorganisations are increasingly recog-nising how agencies should beutilised as an integral part of a creditmanagement strategy.

Creditors cannot treatcustomers fairly with a‘one size fits all’ approach

Creditor collection strategies generallyinvolve increasing the severity of treat-ment as the account progresses throughthe collections cycle. But little is doneto use debtors’ individual circumstancesor their willingness to work with thecreditor, to segment them into specificcontact strategies.

The FSA has been very clear in itsexpectations of creditors. In credit andrisk management specifically, the FSA iscracking down heavily on organisationsthat use high intensity communicationsto help them recover the mountinglosses of the last few years. In line withthe move to principle based regulation,current guidelines are generic but theintent is certainly to reduce the pressureon vulnerable debtors.

Creditors’ systems contain a wealthof data that can be used to ensure cus-tomers are being treated fairly.Throughout the life of the account, datais obtained that can help to identifychanges in circumstances and intowhich category customers are likely tofall when they start to fall behind inpayments. In addition, the shared infor-mation that is held by the credit refer-ence agencies can help provide a holisticpicture of the customer and their finan-cial circumstances.

Once customers have been seg-mented, and the truly vulnerable havebeen identified and helped, specific re-covery strategies can be adopted. Evi-dence shows that there is often asegment of people who can afford torepay at some rate but simply choose

The traditional creditor approach to debtrecovery is ‘one size fits all’. This approach isbeing challenged both by a need to improverecoveries and by the growing importance of theprinciple of treating customers fairly.

BY KURT OBERMAIER, EXECUTIVE DIRECTOROF THE CREDIT SERVICES ASSOCIATION

BY MARK ONYETT, CEO, TDX GROUP

sions (DWP), for example, has beenusing private collection agencies torecover overpaid benefits since 2003;in a more recent tender document, thesame department advised that in the12 months up to June 2007, benefitdebt and/or corporate debt worth£233 million (comprising some400,000 cases) and Child SupportAgency Debt worth £220 million(44,000 cases) was referred to externalcollectors.

But some are yet to be convincedof the value of the debt service in-dustry. So what are their concerns?

First and foremost, creditors’ fear oflosing control, and damaging theirreputation. “Employing a third partyto collect debts does not mean losingcontrol, or putting ones reputation atstake,” says Christine Laycock, clientservices director for The Lewis Group.“As members of the CSA there arespecific procedures and rules that wefollow with teams dedicated to a spe-cific task – and that is recoveringdebt. Our collectors’ methodology isone of engaging the debtor, not con-fronting them. It is this collaborativeapproach that reaps better results, andmaintains the creditor/debtor rela-tionship for the future.”

Second on the list of concerns isone of cost. Senior management em-ploy credit controllers or departmentsto stop debts occurring in the firstplace. To employ an agency therefore,in their minds at least, is doubling up

The changingface of collections

not to do so. This group creates a burdenon legitimate customers and credit man-agement teams therefore need to con-sider both the debtor who avoidscontact but can be visited at home foran evaluation of their circumstances,and the debtor with significant assetswho can be targeted through litigation.

With the tremendous regulatory andreputational pressure that creditors areunder, it is crucial that they fully em-brace segmentation and use all of thedata available to them to match appro-priate treatments to each customer,based on his or her needs.

“only anintelligent mix of

recovery strategieswhich are customerfocussed will resultin customers beingtreated fairly”


Commercial credit scoringCREDIT MANAGEMENT

“The best in credit information andcommercial credit scoring will helpbusinesses to verify that customersare who they say they are, have agood financial standing and look agood ongoing prospect” commentedNeil Munroe, external affairs direc-tor of Equifax. “However, despitemajor developments in accountmanagement tools over the last fewyears, businesses still neglect thecontinued monitoring of customers,which would alert them to the earlywarning signs of possible problems.This needs to extend not just to cus-tomers but to key suppliers as well.

Munroe adds: In 2008, there is nodoubt that businesses will remain

All successful businesses agree that best practice incommercial credit management starts at the sharpend, by credit checking potential customers.

under severe pressure. It is vital,therefore, that account managementis the de facto standard in commercialcredit management, with a very closeeye being paid to the early signs ofdifficulties. Participating in an infor-mation-sharing closed user group onpayment performance could also bevaluable in this respect.”

Tony Pullen, managing director ofExperian’s Business Information divi-sion says that in the current economicclimate, commercial credit scoringcan identify the early indicators of fi-nancial stress and this will be criticalto allow businesses to evaluate riskaccurately. He comments: “The keychallenge we have is that the credit

scoring models currently used by fi-nancial institutions and credit refer-ence agencies were developed againsta backdrop of benign economic cir-cumstances. The question is howthese models will perform in the pe-riod of economic uncertainty that weare now entering.”

While Experian’s own retrospec-tive scoring shows its models to behighly effective, the company stillconsiders it prudent to review itsscoring models regularly. A new ver-sion of Experian’s Commercial Del-phi scorecard is being released totake into account the recent eco-nomic uncertainties.

Pullen adds: “Changes in the rela-tive value of data sources, depend-ent on industry sector as well as sizeof business, will also impact on thecommercial credit scoring arena.Developing scoring models for dif-

ferent market sectors, in addition toexploiting alternative data sources,will deliver greater levels of insightand allow for better risk manage-ment. Such sources include currentand historical payment data, adversefinancial information, non-financialitems such as CCJs, regional failureanalysis and directors‘ information.

Experian agrees with Equifax thatpayment performance data willprove key in the current economicconditions. Experian manages adatabase that tracks £12bn of trans-actions each month, indicating goodand poor payment trends. To assesssmaller businesses on which limitedfinancial information is available,blended data cross-referencing con-sumer and business information isalso vital to identify the wider busi-ness interests and track records ofthose behind a company.

Pullen concludes: “Going forward,organisations will need to assesscompanies they do business withusing broader criteria and tradition-alists may struggle with that. But,as organisations need ever morepowerful and meaningful informa-tion on which to base decisions, it isa necessary development.”

“paymentperformance

data will provekey in the

current economicconditions ”

BY ROB BEDDINGTON

The credit crunch and the timely use of data

A year ago, the term ‘credit crunch’was a phrase that very few peopleknew. Yet after the events of pastmonths it seems to be in almost dailyuse. Technically a credit crunch is aconstriction in the supply and an in-crease in the price of short term lend-ing between institutions, but it hashad a far more widespread impactthan this definition would suggest.

What started out as a loss of confi-dence in the securitised products un-derpinning US sub-prime mortgagedebt, soon spread to the UK, and theimpact of the crunch was felt mostkeenly by institutions that rely onshort term money markets and secu-ritisation to fund their lending. AtNorthern Rock the pressure on fund-ing and the media impact on cus-tomer confidence lead to a run on thebank, an occurrence few of us

thought we would ever see. The credit crunch makes the job of

lending profitably to the right cus-tomers even more crucial.

Application processingWhether it is a new relationship or anexisting customer requesting addi-tional facilities this process has his-torically been based around creditbureau data integrated into a lender’sscoring system, to arrive at an ac-cept/decline decision. The impact ofaccount origination puts a significantonus on risk professionals to optimisethe risk/reward balance not just byaccepting the right customers but bypricing them appropriately.

Against a back drop of overindebted-ness, many lenders are finding that tra-ditional methods of credit scoring arenot effectively identifying a sub-set of

the population that is becoming or arealready overindebted, with the crucialmissing element being the affordabilityof the debt to individual customers.

Lenders are increasingly usingnew tools to identify customers withhigh levels of unsecured debt withwhat would traditionally be consid-ered ‘good’ credit risk profiles (i.e.up to date with their credit commit-ments). In extreme cases of indebt-edness, where the ratio of unsecureddebt to net monthly income is in ex-cess of 25 to 1, it can be seen thatmore than 50 per cent of consumersare up-to-date on their credit facili-ties with multiple lenders, and 75per cent have been no more thanone payment down on any productin the last 12 months.

Recent analysis has shown thatsome over-indebted customers haveimproved their position by releasingequity in their property via a remort-gage or second charge mortgage.

Given the tightening in lending cri-teria following the crunch, it may bedifficult for customers to restructuretheir debt in the same way in 2008.

Rob Beddington talks to Graham Lund, deputymanaging director of Callcredit, about thechallenges currently faced by credit riskprofessionals and the role greater data use can play.

Account managementis crucial

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Integrating riskCREDIT MANAGEMENT

debts. Lately, an increasing number ofconsumer debtors are entering intothese arrangements, in many casesseduced by the intense marketingcampaigns by so called “IVA facto-ries”. This has led to a virtually newmarket, which until very recentlyseemed to go only one way ... up-wards very steeply.

Of course all markets eventually fal-ter and a combination of over capacityin providers and bad publicity aroundfees saw the spectacular growth cur-tailed by the third and fourth quartersof 2007 according to the latest data fromthe Insolvency Service

Such was the concern about thebad press for IVAs that it led to theformation of the IVA Forum, whichrecently announced an ‘IVA Protocol’.Under the terms of this scheme a sim-ple consumer IVA will be the subjectof a standard set of terms and condi-tions. During 2008 I foresee the re-duction in the number of such plansbeing reversed as a result of thisstreamlining. With the advent ofSIVAs (where formalities are reducedeven further), the numbers will againstart to rise steeply.

Corporate insolvencyThe corporate trends statistically also

showed a downward trend in the lat-ter part of 2007. However, underlyingeconomic pressure does not bode wellfor the future.

The most common rescue packageis an Administration, coupled with a“pre-pack”. This process was againborne out of the Enterprise Act, whichsought to address the problem of thestruggling business while at the sametime providing a period of protectionfrom creditors.

Statistics produced for the profes-sional association for insolvencypractioners, R3, by Dr Sandra Frisbyat the University of Nottingham,showed that pre-pack Administrationsaccounted for nearly 40 per cent ofthe total in 2004.

This fast track process has becomethe favoured option in insolvency cir-cles and no doubt will continue apacein 2008 as the corporate lending mar-ket dries up. With 2007 being the yearof MBOs/ MBIs and all manner ofmezzanine finance, 2008 will be theyear that the positions have to be un-wound. If not, the businesses held upby them will sadly fail.

2008 will be a year of opportunity,an opportunity that shows how valu-able professional credit managementis to business!

The unification of the two func-tions provides organisations witha single point for identifying andreporting on who the loss makersare, affords them better visibilityto the status of their customersand, crucially, provides them witha total overview of risk.

Credit management traditionallyrelies on billing information/pay-ment behaviour, which can beslow in predicting problems thatappear. By applying monitoringprinciples similar to those used infraud management (e.g. types andfrequency of purchases, lifestylechanges, address/contact informa-tion changes, etc.) earlier predic-tion of credit risk can be achieved.

The merging of the two functionstakes into account the similar

information that is monitored, e.g:● Goods or services that have not yet

been billed for● Length of customer life● Payment history● Deposits paid● Financial exposure

And the similar actions that aretaken in relation to the customer,e.g:● Requesting early payment● Requesting additional deposits● Limiting service or credit offered● Terminating service or credit

Merging the two functions and util-ising a combined risk managementsoftware solution means that casescan include both fraud and creditalerts. All alerts concerning a cus-tomer are presented in a single casefor investigation and all cases

related to a customer are stored inone place and are easily searchedand viewed. This means that thereis no redundant information and asingle holistic view of the customeris provided. Furthermore, a unifiedcase management process eases thetransfer of cases between groups(fraud analysts and credit analysts)and individuals within thosegroups.

Merging the functions also repre-sents significant consolidation ofdata, which helps to reduce hard-ware resources and IT support.Customer information and serv-ice/transactional information needonly be presented once, resulting ina significant reduction in the num-ber of interfaces that need to beimplemented and maintained.

The BenefitsThere are a number of potentialsavings and improvements in effi-ciency to be gained by integratingrisk into one solution. NeuralTechnologies believes the follow-ing can be achieved by utilizingits Minotaur™ Fraud & Credit

Management Solution (FCMS):● 25% - 40% decrease in cost of

integration and on-going mainte-nance of interfaces

● 10% - 25% decrease in totalhardware costs

● Up to 25 days advance identifica-tion of credit violations with pre-dictive credit limits

● Investigative efficiency is gainedwith easier case transfer andgreater visibility to all customeractivity

Minotaur™ FCMS carries out initialapplication screening for new cus-tomers (using neural predictive an-alytical models) to assess theirpropensity to pose a risk. Once ac-cepted, an initial credit/exposurelimit is established for each cus-tomer, based upon customer seg-mentation, internal company policyand risk evaluation (using analyti-cal models).

After time a picture begins to formregarding customers’ spending, pay-ment and lifestyle habits, and this in-formation is used to automaticallyadjust individual credit limits in line

with their behaviour, e.g. ‘good’ cus-tomers will be rewarded with higherlimits.

Alarms are raised by those cus-tomers who exceed (or who are pre-dicted to exceed) their credit limits.The concept of predicted use is apowerful way to identify problemcustomers in advance. Rather thanwaiting until a subscriber crossestheir limit, the system continues tomonitor their average daily usageand uses this information to predictwhether the credit limit will bebreached before the end of thebilling period.

For further information about Neural Technologies and its solutions contact [email protected] visit www.neuralt.com. Tel: 01730 260 256

MERGING THE CREDIT AND FRAUD MANAGEMENTFUNCTIONS CAN BRING GREAT BENEFITS

Merging the credit and fraud managementfunctions may seem like an alien concept.However, as risk management provider NeuralTechnologies argues, the move can offersubstantial benefits.

Insolvency 2008 - toinfinity and beyond?

Personal insolvency became a front-page issue in the latter part of 2007,fuelled by the spectacular rise inbankruptcies and individual volun-tary arrangements (IVAs).

Since the Enterprise Act came intoforce, early discharge rules have, inmy opinion, fuelled the growth inbankruptcy numbers. However, IVAshave seen the most incredible growthin the same period.

When first proposed in the late1980s, IVAs were meant to allowbusiness debtors to reschedule their

We are by now used to the sensational headlines and phrases“Northern Rock crisis”, “credit crunch”, “sub-prime fallout” andso on, but what lies behind the statistics and what is going tohappen between now and the end of 2008? ICM chairman andcredit manager at Fujifilm Stuart Hopewell considers whetherthe numbers will continue their meteoric rise.

� Stuart Hopewell


Late payment CREDIT MANAGEMENT

It is a truism that in an economicslowdown, businesses rely increas-ingly on credit. Indeed over 80 percent of all business-to-business trans-actions are conducted on credit termsand trade creditors are increasinglybeing used as a source of finance asbanks tighten their lending. A reduc-tion in bank credit means that busi-nesses begin to extend their supplierterms. This leads to businesses beingpaid later for goods/services deliv-ered. It also leads to an increased riskof payment defaults and ultimatelyincreased business insolvencies.

Recent research from the ICM con-ducted by the Credit Management Re-search Centre (CMRC) bears this out. Ina sample of 2000 small/medium-sizedenterprises, nearly half (46 per cent) ofall sales accounts were reported asoverdue, and there was a marked dete-rioration in business-to-business pay-ment behaviour. In the currentenvironment, this trend is likely to

continue since smaller firms rely in-creasingly on trade credit when bankcredit is restricted.

Other research also points to the paceof payment delays increasing. The EulerHermes’ Cash Flow Report (December2007) showed thatpayment delays fromUK customers had re-turned to a level closeto Q1’s five-and-a-half year high -blamed on deteriorat-ing cash flow andgreater uncertaintyamongst domesticclients. Firms in theconstruction sectorrecorded the sharpestrise in payment delays from UK cus-tomers, and this was one factor that wasreported to have depressed their growthof cash flow in Q3.

This fear over liquidity has led UKfirms to downgrade their forecasts for

cash flow growth to just 0.5 per centfor the coming 12 months - the low-est in the survey history. If realised,this would mean a contraction in cashflow in real terms in 2008, and haveserious negative implications forbusiness investment and planning.Not surprisingly, the service sectorexpects to be worst affected, withfirms forecasting an outright declinein their free cash flow of -2.5 per centover the coming year.

Interestingly, government legislation– and specifically the Late Payment of

Commercial Debts(Interest) Act thatenables a business tocharge interest inlate payment – is be-lieved to be having apositive impact onthe effectiveness ofbusinesses to recovertheir outstandingdebts. Unfortunately,however, it is notused widely

enough and – even when it is- shouldn’t be relied upon. Itcertainly doesn’t replace the needfor effective credit management tokeep the cash flowing, and identify po-tential risks early.

Sadly it is nearly always the smallercompanies that bear the brunt of tighterlending policies, and who are forced torely on extended trade credit to funddaily activities, that will be most atrisk from insolvency over thecoming months. And the pre-dictions are bleak. The rela-tively high levels ofindebtedness in the corporatesector coupled with recent in-terest rate increases and adecline in business confi-dence suggest that corpo-rate insolvencies are setto increase by more than20 per cent in the nexttwo years. That meansone in fifty businessescould be insolvent by theend of 2009, and threatenan already fragile economy.

International Credit Management…

our access is guaranteed

With our international network of 24 offices and 165 agents worldwide, we have the guaranteed access and expertise to offer our clients a truly global service.

We are able to bring the best of the world’s credit management practices to the local market with all contact carried out in the local language, and the use of local cultural terms allows us to develop relationships with our clients’ customers no matter where they are.

So if international credit management is high on your agenda, call us today to find out more.

Intrum Justitia

The Plaza, 100 Old Hall Street, Liverpool, L3 9QJTel: 0151 472 7155, E-mail: [email protected]

BY PROFESSOR NICK WILSON OF THECREDIT MANAGEMENT RESEARCH CENTRE

“there was amarked

deterioration inbusiness

behaviour”

Late payment


Debt sale and purchaseCREDIT MANAGEMENT

Sale or no returnDebt sale has come a long way since the firsttentative steps were taken just a few years ago.What was once quite radical is, in certain areasat least, now almost mainstream, a factevidenced by its continual growth.

Proof of this, as Leigh Berkley, chair-man of the Debt Buyers and SellersGroup (DBSG) reveals is how: “In2006, around £7 billion of debt wassold; for 2007, this figure might beanywhere between £8 billion and £10billion, and predictions for 2008 sug-gest the figure could be higher still,assuming the current credit squeezedoes not impact the banks’ ability to

fund purchasers as they have previ-ously.”

The reasons for such significantgrowth are many and varied. JamesCornell, CEO of The Lowell Groupputs it down to increasing consumerindebtedness and, more recently, ris-ing default levels: “Banks and othercredit providers have developed debtrecovery strategies that increasingly

focus on debt sale rather than thirdparty debt collection to manage non-performing portfolios,” he says. “Thischange of strategy has been driven bya number of factors including a re-duction of administration costs, ear-lier recognition of recoveries, andcrystallisation of the value of thedelinquent debt.”

Ken Maynard, CEO of Cabot Finan-cial, concurs: “the advantages forbanks from debt sale remain strongeven in the wake of the credit crunch.Managing the recovery of delinquentdebt takes up valuable business timeand can also rack up expensive legalcosts. Debt sale can reduce these in-ternal costs as well as provide an im-mediate injection of cash to increasea business liquidity.”

Nearly all major lenders now selldebt, with the most active sellersbeing those in the credit cards andloans business. Banks are also sellingmajor portfolios of debt includingcurrent accounts: “Mortgage lendershave been slower to engage in debtpurchase, although this is starting tochange,” Maynard continues, “andthere are still considerable opportuni-ties within mobile phone and utilitydebt. The sale of commercial and localgovernment debt portfolios may alsobe possible as the industry matures.”

Cornell also sees opportunities bothin utilities and the public sector: “his-torically, utilities debt has been re-garded as unattractive due to poorquality of data, low balances and thehigh proportion of ‘goneaways’,” hesays. “Public sector debt is potentiallymore attractive but current legislationdoes not allow government agenciesto sell.”

Cornell and Maynard also agreethat recent regulations, notably BaselII, have also strengthened the case fordebt sale: “Outstanding unsecuredloans tie up a bank’s capital withoutadding value, so selling them is an ef-fective way to free up capital for morebeneficial uses,” Maynard says.

A principal reason for the contin-ued success of debt sale is that issuesof ‘trust’ between buyer and sellerhave been largely overcome, espe-cially in relation to protecting theseller’s reputation. David Berry, man-aging director of The Lewis Group,believes there is another reason:“Sellers are being greatly assisted bythe high prices that debts are now re-alising,” he says. “If they want suchprices to be maintained, however,then buyers are going to have to workmuch harder with the debt, and thatmeans opening up the option of sell-ing the debt on to a second pur-chaser.”

Cornell too sees a future in so-called ‘secondary debt’: “It is a strat-egy that is already common in moremature debt sale markets such as theUS and Scandinavia,” he says.

Of course, with reputations para-mount, some sellers would recoil inhorror at the thought of a debt beingsold on to yet another party. But notall sellers feel the same way: “In acontract, recently, from one of themajor players, provision was madeand specific clauses added to enablethe purchaser to re-sell the debt ifthey wish,” Berry says. “Of course itrequired the buyer to obtain the ex-press permission of the seller beforedoing so, but it also stated that suchpermission should be not unreason-ably withheld.”

Philip Lunn, CEO of Aktiv Kapital,has knowledge of similar practices: “Itis a statement of fact that most recentcontracts have a provision for sec-

BY SEAN FEAST

ondary sale if we want to, althoughof course we have to seek the origi-nal seller’s authority first. From apractical perspective, we haven’t yetsold anything on ourselves.

“The issue of reputation is an inter-esting one,” he continues. “It is notjust the seller’s reputation that is atrisk, but also our own. Secondary salebrings in new levels of risk not just tothe original vendor, but also the orig-inal buyer. And our reputation is justas important.”

Berry thinks that some sellers’ con-tracts are too prohibitive, and in ef-fect restricts growth. With the costs ofportfolios rising significantly, it is dif-ficult for smaller operators to enterthe market, unless they can buy sec-ondary debt. Maynard agrees:

“In the short term, debt purchasewill be a difficult place for new en-trants and those existing playerswho do not have sufficient access tofinance, but for those who can rideout the current turmoil it is likely toresult in a more realistic, balancedmarket in terms of the price of port-folios, which have seen significantincreases in recent years. For estab-lished purchasers who can demon-strate strong data quality, have aproven track record and an appro-priate customer ethos, the potentialfor growth in the longer term re-mains positive.”

“If the currentcredit squeezedoesn’t impactbanks ability tofund purchasers,

debt sale in2008 could be

higher than everbefore”

Leigh Berkley, Chairman, DBSG

Visi_n_ and id_asWith EOS they are achievable.

Information management Arrears management Receivables management

Outstanding accounts, defaulting customers and slow payers – liquidity problems are the greatestobstacles to realising ideas and exploiting new business opportunities. This is why EOS is developingcomprehensive solutions throughout Europe that will give you the freedom you need to enjoy asuccessful future.

Find out more about us and our information, arrears and receivables management solutions atwww.eos-group.uk.com

Your partner for financial solutions

Thursday, 6 March 2008, EXCEL, London

IS AT A CONFERENCETHE BOSS“

”

The organisers of icm08 have once again delivered on their promise of

devising an authoritative and imaginative annual conference programme,

bringing together some of the profession’s leading exponents of credit

management best practice. An insight into how credit management can be

implemented within a global business – in this case Shell International – is

complemented by a discussion on how to inspire and build effective teams at

a more local level, specifically Transport for London.

Such ‘management’ topics run alongside presentations on current and

future economic trends from a global information provider, whilst a dedicated

insolvency practitioner gives his analysis of rising business failures.

Well-informed technical presentations follow, including a forensic examination

of identity fraud and the introduction of the Single European Payments Area.

Alongside the industry experts are also well-known names from the world of

journalism and broadcasting to keep matters running smoothly – notably

Adrian Chiles and Peter Sissons. Both men bring an air of professionalism to

an already professional day. So join us at the icm08 Conference – the

conference you won’t have to find excuses to attend.

TO BOOK YOUR PLACE AT THE CONFERENCE,

INCLUDING FREE ENTRY TO THE icm08 EXHIBITION,

GO TO www.icm08.co.uk NOW!

Association of Credit Professionals F15

AlphaLAW F2

Atradius C5

Bierens & Sons Lawyers F6

Business Change Partners Ltd B8

Callcredit C7

Carrick Read Insolvency Solicitors E8

CCI Legal Services Limited F13

Clarke Willmott D5

Coface E11

Colemans-ctts F16

Coltman Warner Cranston LLP E3

Credica F7

Credit Collections and Risk D2

Credit Today A3

Creditsafe D1

Credit Services Association E12

DataInterconnect F11

Else Commercial Solicitors F12

Equifax Plc A5

Euler Hermes UK B3

Experian E9

Frettens Solicitors F9

Graydon UK Limited D6

Hays Accountancy & Finance F3

High Court Enforcement B5

i-Many International C8

Jobs in Credit F8

Legal Recoveries & Collections Ltd E7

Moreton Smith F17

OnGuard Software F14

Premium Collections Limited F1

PricewaterhouseCoopers F5

Prodant Limited F4

Registry Trust Ltd E5

Scott Rees & Co E2

Shergroup D3

TALKINGtech F10

The P&A Partnership E1

Thomas Higgins & Co D4

Tracesmart Ltd E6

The Institute of Credit ICM

Management, with Zone

Financial Services Skills Council

London Metropolitan University

Thames Valley University

VISIT SOME OF THE TOP NAMES IN THE CREDIT INDUSTRY AT icm08

Empowering the credit professionONE DAY, ONE VENUE, ONE PURPOSE

THE INSTITUTE OF

CREDIT MANAGEMENT

www.icm08.co.uk

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