Credit scoring; why, how, what and its advantages

Credit scoring: why, how, what and its advantages

If you’re new to credit scoring, you’re likely to have some questions. Here we answer all your questions and show exactly how credit scoring will benefit your business’ cashflow.

As a collector, you come into contact with all kinds of customers. Some regularly pay their suppliers on time, while others refuse to meet the agreed payment terms and conditions. In short, no two customers are the same. Most credit scoring software programs deal with customers in a similar, sometimes negative way, without looking at their circumstances and payment behaviour. In contrast, Onguard looks at each customer individually.

What is a credit score?

In simple terms, credit scoring is defined as a method of evaluating and stating the creditworthiness of individual customers through the application of a set of rules on information collected in a database.

A credit score provides a means of rating and comparing customers’ performance in terms of quality and quantity. Furthermore, it provides a more sophisticated and meaningful measurement than a rating based simply on payment performance or period.

As part of Onguard’s CreditManager software, its credit scoring capabilities brings together both internal and external data and addresses the issues traditional credit scores ignore to provide a viable solution for credit managers.

How exactly does it work?

Unlike other credit scoring software, Onguard’s software is based on the activities that take place between a supplier and an individual customer. It represents a true analysis of each specific relationship. In addition to this, we are able to take into account the number of issued invoices and the effort required to collect payment. For example, fulfilled promises can improve a score whilst broken promises degrade a customer score.

The score also considers external information, like an almost exceeded credit limit, credit insurance information or ratings. Vital information from other systems such as risk codes, location and orders stops can also be imported into the database. In essence, the score is a rating of the relationship with a customer in terms of financial and non-financial activities. When combined, this important information will form the complete overview needed to score all individual customers. The resulting score is displayed on the customer information screen, a customer specific report and an overview report per administration, showing the history of each customer’s credit score.

Why will credit scoring benefit your business?

There are clear benefits for credit managers; speed, accuracy, consistency, a reduction in bad debts, prioritisation of activities and clear risk analysis. Adopting a clear, consistent scoring policy enables credit managers to compare customer performance and historical trend analysis without pattern exceptions. Most importantly, individual credit scores can be used to segment customers. You can place them in the right workflow and create the best actions for each customer. You can also generate actions for someone within the organisation, such as a temporary change of workflow, a warning or escalation. Ultimately, Onguard credit scores are useful for businesses to a complete picture of each individual customer, so finance departments can better analyse risk, work more efficiently, prioritise and reduce debts.

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