Katrin Herrling. co-founder and CEO of Funding Xchange
News Alternative Lending Digital Banking
Return to pre-pandemic lending risk analytics ‘misses key challenges’
A report claims government support during the pandemic created an artificially positive outlook for many businesses, which is now misleading in light of 2022’s economic challenges.
A return to a pre-pandemic approach to evaluating risk may be flawed, according to a new report by Funding Xchange.
The report claims that the money injected into UK small businesses by the government over the pandemic, which is slowly running dry, ‘sanitised’ arrears and defaults, preventing business failures that under normal circumstances would have occurred.
Building risk assumptions around data sets built on events like arrears and defaults may therefore be “misleading” in the current environment according to the report, which claims this will necessitate an improved understanding of businesses' actual trading performance and available cash flow.
Funding Xchange quoted treasury's statistics which found the number of insolvencies has risen by 40 per cent year-on-year to June 2022, and said that the cash balances held by UK businesses are at their lowest level since before the start of the pandemic.
The report went on to suggest alternative approaches to assessing the risk profiles of businesses.
These included assessing the credit profiles of directors themselves, with the report claiming that while “trading performance and cash balances are important, the last two years have also clearly shown that directors with a strong financial profile have been able to steer smaller businesses more successfully through the challenges”.
The report also promoted a proactive approach to credit scoring.
Funding Xchange said “waiting for a rise in arrears and defaults before acting removes the opportunity to affect outcomes” and that “early indicators are critical to understanding the trajectory of a lender’s portfolio and creating the window to pro-actively engage with customers before arrears and defaults occur”.
Funding Xchange isn’t the only one promoting a relatively pessimistic outlook regarding the future of UK businesses.
iwoca’s latest SME expert index reported that 77 per cent of brokers claim that the possibility of a recession concerns the small businesses they work with.
The news comes after the Bank of England recently predicted the worst outlook for the UK economy since 2008, following its historic 1.75 per cent rise in borrowing costs.
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