Experian figures show that insolvencies were down in the month of November, but the business climate continues to be volatile with many companies still struggling to survive.
With this in mind, it is now more important than ever to make sure resources are focused in the right areas and that the valuable hours businesses put into targeting new clients are time and effort well spent.
A failing business can have a negative effect on other businesses and in an environment where the probability of targeting and acquiring failing business customers is high, the first step is to take them out of the equation.
Cash-flow is the lifeblood of a company and dealing with late payers, high-risk companies and bad debtors can have a serious impact. More and more businesses are becoming wiser to the fact that pre-screening will weed out these companies at the first stages of the targeting process.
However, the most common use of prescreening is the automatic blanket exclusion of all businesses that fall below a selected low credit score from being targeted. While this can prove highly effective in avoiding the businesses most likely to fail within the next 12 months, it can also significantly affect the volume of prospects being marketed to.
The unfortunate consequence of a far smaller list of prospects to target is that some businesses end up choosing not to use pre-screened data at all – a dangerous option that will leave them open to cash flow problems if the risky customers then go on to default on payments.
Alternatives to a blanket approach
However, not every single business classed as risky will fail. Many will take some serious steps to change the path they are going down. By taking advice, reviewing current operations and adopting best practice, some of these apparently risky companies will manage to turn their fortunes around.
Furthermore, the action of taking such businesses on board as clients and supplying them with the goods they need could be all they require to help them engineer themselves towards recovery.
Instead of ignoring large numbers of businesses there is a far more intelligent way of using pre-screened data that could not only ensure a substantial prospect list and the desired increase in new business, but also ensure payment. A more successful approach is to tailor the use of the intelligence to the business risk.
So for instance, a small proportion of the market may well be entirely excluded since it represents an extremely high default risk. However, beyond the extremely risky businesses, by considering more appropriate payment terms and conditions or up front deposits, this would enable businesses to continue to take on new customers, but at a much lower risk exposure.
These decisions will be based on credit scores, but also on other characteristics such as payment history, growth potential and other more dynamic measures, all of which can lead into risk adjusted pricing (higher premiums) at the start of a relationship.
Furthermore, if the status of a high risk business later changes and it begins to grow, it could become a more profitable customer in the future.
A second benefit of pre-screened data is the key role it plays in ensuring a relationship built painstakingly by the sales team is not severed at a later stage by the finance team.
Don’t act too late
Most larger businesses have a strict credit checking policy in place that comes into play after a deal with a new customer has been negotiated and they believe that this is sufficient enough. However, as pressure on sales teams to close deals increases, negotiations may take on certain payment terms or discounts in order for them to secure the sale.
The last thing the sales team, or indeed the business wants to see, is for a prospect to be rejected when it gets to the credit stage of the process as this can represent a significant reputational risk to the company. There is often little opportunity for the deal to be renegotiated and the relationship is lost.
This highlights the importance of pre-screened data at the start of a relationship to determine how far negotiations can be taken, or the whether the business should even be approached. Ultimately, it will avoid embarrassment at a later stage.
Therefore it’s clear that businesses can gain great value by taking advantage of pre-screened data from a risk management point of view and also equipping sales teams with this valuable insight for the current volatile economic market.
