Newstricky| Giving out credit is always a risk, and insurance providers make this risk with every single offer. With such a constant huge risk rate, they need to use whatever they can in order to minimize the risk in making those decisions. Today, we will talk about some of the ways that insurance providers can determine whether their customers are financially strong enough to be a good investment.
Table of Contents
When in Doubt Consult the 5 Cs of Credit
Capital
The capital of a business gives you a picture of the financial holdings that they hold, as well as a rough estimate of the number of cash investments that are made into the company. You can use this information in order to secure the financial stability of your clients. They can also be an indicator of growth or decline, showing clear numbers over the years. If they have made growth, odds are that the creditor will trust the client more. The results can differ from company to company, as some will be more prone to real estate investment than others. However, different industries and companies will require different amounts of investments in certain funds, so this can give you a wrong impression of the real situation the company is facing. If you are not keen on real estate investments then it is better to display other facts to persuade the client into trusting you.
Character
The credit managers use a character test to determine whether a potential client is trustworthy. This can include a range of factors: your payment history, references, any brush-ins with the law, or any document that helps show your credit repayment reliability. This is one of the most important factors in determining if a client is eligible for the credit as it’s up to the credit giver to assess whether the applicant seems trustworthy.
Capacity
The big question of the creditor is whether the business that requests the loan will have the money needed to pay it off. If they don’t have a sufficient cash flow, this can become a problem. The more detailed the financial history there is, the better the odds are for the loan to pass. If the creditor deems the business unfit to repay the loan, they will need to add collateral or get rejected.
Conditions
By conditions, we mean external conditions. It is vital to look at the environment during the making of the loan and the direction it is taking. This includes factors such as the state of the economy, the stability of the country where the proposed business is supposed to open as well as whether the line of business is in decline.
Collateral
If the client is somewhere in between passing and failing for credit, the insurance provider might ask for collateral in order to secure the debt obligations. Any machinery, real estate, or inventory piece of worth can be used as collateral.
Use Known and Proven Data
Proven data have been the biggest factor in shaping creditor decisions lately. They add so much efficiency to the process and leave minimal chances for guesses or fake statements. The most notable example would be trade credit insurance. It shows so much customer data and is relatively easy to fetch, because of this it has made the entire process way more efficient. Then there are factors such as:
- Current past-dues
- Third-party data
- Credit and data analysts
- Using property risk databases
The more information and data the insurance provider has, the more confidence they will have in their decision when considering giving out a loan. Generally, when you have an advanced database at your disposal you are able to make more concrete decisions, this is why some providers will opt for insurance distribution management software in order to attain more data and make more worthwhile credit offers.
Run a Credit Report
In order to check an applicant’s credit rating, you can use a business credit report. The report is used to give you data on the likeliness of a business paying invoices based on its history of payments. It gives you all kinds of financial data, from their annual sales to their credit limits. Finally, it gives you a business credit score that determines how viable the business is for credit repayment.
Don’t Be Shy to Ask for References
It is not uncommon to see insurance providers ask for references in order to reach their decision. They add a whole new layer of trust between the involved parties, as it involves third parties that have previously worked with them and can vouch for them. Usually, you can ask for references from the customer’s bank or any businesses they have worked within the past. Keep in mind that references will, most of the time, vouch for the person in question. This can lead to a bias in presented information, as they will certainly not give you people that they have disappointed as references. Be prepared for waiting, cause this process can get long in order to gather all of the required information from the given contacts.
