The credit industry works very differently than it did even a few years ago. In recent years, new technology and the availability of analytics means that credit departments have much more information to make decisions. When both commercial and consumer data is used together, departments unlock a lot of powerful data that can be combined for more accurate decisions. However, some credit departments have not changed their processes and staffing structure. By using the traditional approaches even with new technology and data, credit departments are not able to see all of the possible benefits. I recently spoke on a panel of credit management executives at the High Radius Conference. During the talk, we touched on this topic and talked afterwards about what credit organizations need to do. Jan Minniti, Senior National Account Executive with the National Association of Credit Management mentioned that while many large organizations are using automation, even smaller shops can benefit as well. But her larger point was in order to transform, organizations must change the skill sets that they are recruiting, and expand training offered to current employees. Here are a few keys to help your organization transition to modern credit management: 1. Understand the recent evolution of credit models and technology As Minniti pointed out, we started out with general payment score models that were applied to everyone. However, today more specific models are available (for example, specific to an industry), so you can choose the best model depending on who you are selling to. These new models move us into a new generation where instead of making gut feel decisions or spreadsheets to track data, we can use statistics to not only assess risk, but also assign credit line increases. These scores and credit lines can then be fed to automated tools to manage the order-to-cash process. Even more importantly, we can use automated technology for account management strategies, which increase efficiency, maximize account potential and reduce fraud. In our experience at Experian, we have evidence that machine learning reduces manual reviews by as much as 74 percent. 2. Learn how credit managers can revise their role and processes Research recent changes in the financial services industry for inspiration on what is possible and how to help your department get to the next generation. Typically the FinTechs and large banks are on the leading edge of advances in risk management. By starting with analytics, the financial industry has driven a lot of innovation and change. They have also focused on data management to evolve to a frictionless environment. Think of how your company can incorporate these changes. But most importantly, how you as a credit manager can introduce and drive the change. 3. Revise the credit manager role to include more strategy Instead of shrinking from the change out of concern that technology will replace your role, credit managers need to lead the change. Start by learning what’s possible with regards to both technology and data. Share it with other credit managers and leadership to help your company be an early adopter. But, be careful not to fall into “shiny object syndrome”, where you use technology just because its available, even though it might not yet have the features you need. A solution in search of a problem is always a questionable approach. Minniti says that she knows changing the roles is challenging because it is a big shift and credit is not typically the shiny, new area of the company. However, to reduce risks and impact change, credit managers must seek greater visibility with the C-Suite. “Credit managers should educate management by using reports to show the importance to your company. Use data to show how much money you are saving the company,” says Minniti. “It’s also important to talk about automation, which actually helps credit managers stay relevant instead of replacing their jobs.” Having an automated credit strategy is also a great way to manage in times of turnover, or in trying to up level expertise. 4. Revising staffing and hiring guidelines Minniti says it starts by picking good analysts who can replace you. “If you staff with people who listen to what the machine learning is saying, but don't have the ability to think beyond that then who fills your shoes when you move on? What happens to the credit department?,” says Minniti. “We will always need people to tell the machine what to do, be able to adjust the model when the economy changes.” One of the biggest reasons that many managers and departments are resisting technology is fear of being replaced. This simply isn’t going to happen. Without the experience and background, credit models quickly decay. It is impossible to turn over all of the thinking behind credit decisions to machines. Someone needs to be there to manage the ongoing performance of the models, and make sure the analytics track with changes in the marketplace. Credit departments that take initiative to lead the change, to use the new technology and models, will demonstrate their value to their organization. By using automation and machine learning, the credit department becomes more valuable to the organization instead of less. By proactively managing the change and taking the lead, you can set your department on the right path to lead the transformation of your company as well as the credit industry.

In this week's guest post,  Scott Blakeley shares perspectives on a growing trend in business - Terms Pushback (TPB). Scott is the founder of Blakeley, LLP, a noted expert in the field of creditors’ rights, commercial law, e-commerce and bankruptcy law. Scott regularly speaks to industry groups around the country and via monthly webcasts on the topics of creditors rights and bankruptcy. After a slow sales quarter, a large retail clothing store needs to improve their working capital and cash flow. Before the 2008 recession, the retailer likely would have turned to traditional business credit options. However, after the downturn, lenders changed their qualifications and terms, making traditional credit options a much less desirable option. In some cases, retailers, especially midsize or new businesses, can no longer even qualify for traditional credit sources. Businesses are now increasingly renegotiating their payment terms with suppliers through a program called Terms Pushback (TPB). When a jewelry retailer reviews its payment terms, for example, it sees that the main vendor supplier for jewelry currently requires payment 15 days after delivery. As a deliberate strategy — which is different from a company not having the money to pay its bill — to give the retailer more working capital, they reach out to ask the supplier to change the terms to 30 days. This means they would have access to the money paid to the vendor for 15 days longer; this process is often referred to as trade credit. Credit Today found that the most common extension is for 16 to 30 days, with 45% reporting this range as the most common extension. Impact of Terms Pushback on Suppliers While TPB improves cash flow for customers, it causes issues for suppliers because they must wait longer for their payment. Many consultants are now actively recommending TPB as a best practice. Because international companies more commonly using this strategy, many U.S.-based companies are adopting it due to international influence. Companies operating as middlemen between retailers and manufacturers often face the biggest challenges. Longer terms mean that they have less capital to buy more products and have a higher number of outstanding receivables. Additionally, businesses have lower cash conversion metrics, which can hurt publicly traded companies and cause concern for shareholders. According to Credit Today Bench-marking, 19% of suppliers always or usually say no to requests for extended terms, and 3% usually agree. Interestingly, 4% report that their answer depends on customer size — yes to large customers and no to small customers. However, the majority (63%) of businesses review the requests on their individual merits. However, denying the request often has long-term ramifications. If the business denies the request, the customer must pay or suffer credit damage. Customers often get around this by paying late enough to improve their own cash flow but before credit damage occurs. Even more challenging, suppliers are often hesitant to report customers to credit bureaus because this often permanently damages or even ends the relationship. If a supplier denies the request, the majority of options to get the payment are punitive. For example, the supplier can charge a late fee for payment. However, the customer may still decide that the value of the money for the extra days is worth more than the late fee. Other avenues include implementing a credit hold, having two price lists, terminating credit, firing the customer and reporting the customer to industry groups. However, each of these options permanently damages and probably ends the customer relationship, which may result in loss of a high volume of sales. Effectively Managing Terms Pushback with Supply Chain Finance Programs Supply Chain Finance programs are asset-based lending programs structured to improve a customer’s payment terms, reduce costs and improve cash flow enabling financial institutions to pay suppliers for invoiced services. Suppliers can benefit from SCFP as it receives payment within normal terms or earlier which helps keep the credit team’s credit scoring and risk models consistent. The customers benefits as well as their capital is not tied up in day-to-day operational payments and creates more reinvestment opportunities. When a company receives a TPB request, the first step is evaluating the customer — their credit, the risk, the volume of business and the value of the relationship for the supplier. Often, larger companies have an advantage over smaller companies when negotiating term extensions because their business relationship is worth more to the customer than the monetary value of the shorter term. Here are three best practices to managing TPB requests: Offer incentives for shorter terms. Instead of punitive actions, consider giving customers who pay within shorter terms a discount or an annual volume discount for consistent payment with shorter terms. Actively monitor threshold for customers with extended terms. Suppliers must effectively manage their own cash flow to make payroll and other expenses. By extending too many customer terms, suppliers can jeopardize their own financial stability. Create a team to evaluate requests. By establishing a process to handle the requests and a team to formally evaluate requests, suppliers can more effectively evaluate all aspects of the decision, such as the risks of extending to its own financial health and the risk of losing the client relationship. With a team made representing stakeholders from different departments, all perspectives can be represented and considered. As TPB becomes more common as a strategy, suppliers must proactively create a process to manage requests. Often, extending the terms can improve the customer relationship and even increase the amount ultimately paid. By creating a team and strategy, suppliers can make the smartest decision and actively manage pushback requests. Scott Blakeley is a founder of Blakeley LLP, where he advises companies around the United States and Canada regarding creditors’ rights, commercial law, e-commerce and bankruptcy law. He was selected as one of the 50 most influential people in commercial credit by Credit Today. He is contributing editor for NACM’s Credit Manual of Commercial Law, contributing editor for American Bankruptcy Institute’s Manual of Reclamation Laws, and author of A History of Bankruptcy Preference Law, published by ABI. Credit Research Foundation has published his manuals entitled The Credit Professional’s Guide to Bankruptcy, Serving On A Creditors’ Committee and Commencing An Involuntary Bankruptcy Petition. Scott has published dozens of articles and manuals in the area of creditors’ rights, commercial law, e-commerce and bankruptcy in such publications as Business Credit, Managing Credit, Receivables & Collections, Norton’s Bankruptcy Review and the Practicing Law Institute, and speaks frequently to credit industry groups regarding these topics throughout the country. He is a member on the board of editors for the California Bankruptcy Journal, and is co-chair of the sub-committee of unsecured creditors’ Committee of the ABI. Scott holds an B.S. from Pepperdine University, an M.B.A. from Loyola University and a law degree from Southwestern University. He served as law clerk to Bankruptcy Judge John J. Wilson. He is admitted to the Bar of California.

  Experian and Moody’s Analytics have just released the Q2 2019 Main Street Report. The report brings deep insight into the overall financial well-being of the small-business landscape, as well as providing commentary on what certain trends mean for lenders and small businesses. Q2 Highlights In spite of business confidence in the second quarter, shaken by talk of trade war escalation, small businesses got a helping hand from seasonal factors that combined to push delinquency rates down. Delinquency rates for businesses with fewer than 100 employees fell in the second quarter, decreasing the 31–90 days past due rate from 1.74 percent to 1.64 percent for the quarter. But agriculture’s problems continued as weather and trade conditions continued to weigh on small farms. These factors won’t be as helpful in the third quarter, so fundamentals or confidence will need to improve to propel performance and growth forward. Bankruptcies ticked up ever so slightly again in the second quarter coming in at over 16 basis points. The most recent data available, from Q4 2018, indicates an establishment growth rate of 2.3%. Enough of these new businesses will seek credit to ensure that, combined with existing borrowers, balances look set to grow for some time.   Overall, small businesses continue to display little to no signs of broad-based weakness. What weakness exists is fairly well confined at either the regional or industry level, and the solid performance that has been the norm for the last several quarters looks set to continue. Watch Webinar Recording Experian and Moody's Analytics go in-depth on the Q2 2019 Main Street Report in the below webinar.

Experian has just released the Women in Business credit study, which is a three year study of around 2.8 million credit files for small business owners, and one of the key findings in this study was that, women business owners in particular, are reliant upon personal forms of credit, and they may be at a disadvantage through this practice. So we wanted to talk to some women business owners about business credit. First up is Sara Evans from Sevans Strategy. Experian: Sarah, could you tell us a little bit about your business and how you got started in PR? Sarah Evans: Certainly, I was a PR major in college. And, when I originally graduated I was very interested in the nonprofit sector, so I went to work for the largest health care system in Illinois, and focused heavily on communications, internal comms and government relations. From there did some PR agency work and then became director of communications for a small community college. And throughout all of that it was at the time of emerging media or digital media and I was a bit far ahead of my nonprofit hat that I was wearing. So, at night I would go home and consult for companies and businesses who are ready to do emerging technologies, planned and implement them and essentially worked myself out of a job and have now had my company Sevens Strategy for the past 10 years focused specifically on digital PR? Experian: Do you rely on personal forms of credit for your business? Sarah Evans: I am completely self-funded. In fact, when I transitioned out of my traditional day job I had an amazing boss at the time. We did a three month exit strategy, so they could find my replacement. And so, I could also build up enough business, steady business to be able to move forward. And, because of that I believe I set myself up in a way that it has, it has done well. Experian: Have you ever run your business credit report? Sarah Evans: I haven't. Perhaps I should. I know Experian could probably help me with that. Experian: Well our study revealed that many women business owners will fund their operation through personal forms of credit. Is that something that surprises you? Sarah Evans: It doesn't surprise me, no. I think some of it is, for example when I decided to get into business for myself, I didn't have necessarily the business acumen or the background or a business degree. A lot of it I learned on the go. So, you take your habits or best practices that you may already use in your everyday life and just transition them over to business. I think a lot of it is learn as you go or finding and learning from industry experts that can help you do better. Experian: So do you think there's a need for additional resources around building strong credit and best practices in business credit? Sarah Evans: I think there is a huge opportunity and in fact if it already existed I would have had no idea. I also think it's important for this up and coming generation especially as we see an uptick in the rise of entrepreneurs. Every day we see new businesses and product ideas that are launching. There are prime candidates out there that may be great at honing an idea or bringing a business plan to life but not sure about the financial aspect of it. It'd be great to have a partner and a resource area where you could go to, and not just from the credit bureaus themselves or financial institutions themselves, but from trusted business resources who might work with them. So that I don't feel like I'm going all in on an institution that I may not have full trust in, but I might trust someone that they work with or that has used them already. Experian: Well thanks for coming on and sharing about your business Sarah. Sarah Evans: Thanks so much Gary. Experian: Well next we're going to speak to Linda Waterhouse and she is the owner of WSI, a digital agency. Linda, can you tell us what your business is primarily focused on right now? Linda Waterhouse: Yes, I am a digital marketing strategist, and I focus on helping professional women use LinkedIn for lead generation. Experian: Ok that's great. And so how long has your business been in business? Linda Waterhouse: My business. I've been running my business for about six years now. Experian: So how do you feel about taking on debt for your business? Linda Waterhouse: I have so far just invested our personal money rather than going outside to a bank or other lending facility to get a loan. Experian: So, can you tell us why you have used personal forms of funding for your business? Linda Waterhouse: I haven't really relied on like personal credit cards. I've delved into our long-term savings with the intent of paying it back. Part of that was because I thought that it was less expensive to not pay interest on that. All we would be losing is the interest that that money would be earning and since interest levels are low right now, I didn't think that that would be as significant as if I were to go out and get a loan, and I don't know what the interest rates are, you know, 5, 10 percent. So it seemed like a more economical way for me to start my business. Experian: And can you talk a little bit about the growth of your business? Linda Waterhouse: This year I decided that I was really going to focus on one social platform which is LinkedIn, and to help women business owners primarily learn how to use it for lead generation, because many people still think of LinkedIn as just for job searchers and recruiters. Experian: So Linda, have you run your own business credit report? Linda Waterhouse: Oh, you caught me. No, I haven't because I don't have any immediate plans to take a loan. So I have to say that I do not have any credit or I don't know what my credit score is. Experian: So, if there were resources on building and maintaining strong credit, would you take advantage of those resources? Linda Waterhouse: Yes. And I think taking people through the process would help starting or creating another opening another credit card is something that I've done personally? So, opening one for my business is very familiar and I can do it online. I have no idea how to do a business loan. I don't know which bank to pick. So, that's you know the unknown is always something that people are going to be wary of. Experian: Last question. What do you like most about being a business owner? Linda Waterhouse: The best part of being a business owner who works in digital or online is the fact that I can work from nearly anywhere. I recently accompanied my husband on a trip to Brussels in Amsterdam. He had work there, and I went with him and I could keep up with my work when I was there. So we were able to have a longer stay there than I would have been able to had I been tied to work here in New Jersey.  

Experian and Moody’s Analytics have just released the Q1 2019 Main Street Report. The report brings deep insight into the overall financial well-being of the small-business landscape, as well as providing commentary on what certain trends mean for lenders and small businesses. In Q1 U.S. small businesses brushed off a government shutdown as stock markets recovered and income gains remained steady. Delinquency rates remained mostly stable, with pockets of weakness spread out among regions and industries, notably agriculture in the Great Lakes and manufacturing in the Southwest. Small firms seem to have simply shrugged off the headwinds of the first quarter and kept on with business as usual. Despite a fresh escalation in trade tensions,  the year is starting off well with positive news coming from the areas presenting risks to the outlook. A dovish stance on interest rates from the Federal Reserve and room to grow in our housing market — 2019 is off to a strong start. Watch Webinar Recording -  Q1 2019 Quarterly Business Credit Review Listen to the experts from Experian and Moody's Analytics go in-depth on insights revealed in the Q1 2019 Experian/Moody's Analytics Main Street Report.  

Serving commercial Property & Casualty insurers is a major objective of 3rd parties in the analytics and data space. This industry vertical is one in which standard credit tools already apply to the carrier’s challenge in managing claims risk; there is continued investment within and beyond the industry in developing innovative tools for this purpose. However, a smooth roll out of such tools at scale requires a comprehensive understanding of the regulatory process and its constraints. US Insurance industry- overall regulatory structure: Currently, US carriers are regulated primarily by the individual states, a result of the 1945 McCarran Ferguson Act (“MFA”). Less known is that the MFA was presaged by the Paul v Virginia decision (1869, later overturned by SCOTUS) that held that issuing an insurance policy was not a commercial transaction! [1]. Federal regulatory guidance, ultimately from the Office of the Controller of the Currency (OCC) and the Federal Reserve Board (FRB), is implemented via the National Association of Insurance Commissioners (“NAIC”; see below). NAIC organizes the insurance commissioners from all 50 states, Washington DC, and territories. NAIC maintains legislative databases, market conduct standards, industry financial reporting, conducts training, and many other functions. NAIC provides supervisory guidance for the use of models used to predict insurance loss risk. Among other functions, NAIC has created the Own Risk and Solvency Assessment (“ORSA”) framework which implements existing OCC and FRB guidance to the states. Capital reserves needed for solvency as well as business conduct -- including product definition and general business operations, licensing, maintaining a guaranty fund, underwriting, and rate setting-- are determined primarily by the states in which the carrier operates [2]. Today’s system of state-by-state regulation is more challenging than an equivalent centralized regulating body; insurance carriers operate increasingly online, driving the need for multi-state operations which in turn require multistate licensing and complex regulatory compliance. The average property liability firm has 16 state licenses, while the average life insurance carrier has 25. The coordination of state insurance laws, as well as many other quasi-governmental insurance industry functions, falls under the aegis of the NAIC. We will focus our discussion here on the regulation of risk models. How should third parties align the model building with regulatory requirements? Example 1: Basic filing and disclosure protocol: Responsibility to disclose to state regulators typically lies with the developer or the owner of the model. Disclosure responsibility for custom risk models built around the data of a specific client insurer resides with the insurer, while industry standard models used for multiple clients are typically disclosed by the model developer. Reporting and disclosure requirements vary by state. While the most central functions of interest by state regulators are underwriting and rate setting, any other use of models by insurers may be subject to regulatory disclosure. Models used to assess loss risk for rate setting or underwriting purposes are typically examined for discriminatory impact and use of prohibited data in addition to adequate risk performance and numerical stability. “Prohibited data” varies by state but may include certain data elements gleaned from in-state residents, federal crime data, certain credit data elements, traffic violations exceeding a specified age on the books, or other data; the section below deals with credit data. Finally, the requirement to disclose model details such as attributes and weightings also vary between states, and may require the developer to invoke trade secret status for the subject models to avoid disclosure to the public (implicit in many states). The adjudication of such claims is variable between states, as are all communications with regulators on this topic. Example 2: Use of consumer credit information to underwrite personal insurance policies: Using credit information in models to predict loss risk on personal insurance contracts also has a rich and extremely active history in the US. P&C insurers have generally found that credit risk and claims risk are positively correlated. They have used credit data on individual consumers to various degrees. Notably, the Consumer- Based Insurance Score (CBIS) employs consumer credit parameters and has been used across the insurance industry since 1993. Amid vigorous debate, states have seen active legislative attempts to restrict and define allowable use of consumer credit data by insurers. Credit information in some cases can outweigh a consumer’s driving record in setting rates- leading to the bitter but factual observation that excellent consumer credit can literally outweigh a DUI conviction in some states and conditions. In 2016 alone, the state legislative actions below were considered and/or enacted; note once again that the ability of individual states to regulate independently greatly complicates the picture for large carriers operating in multiple states:  California, Hawaii, and Massachusetts do not appear in the table above. In those states, consumer credit information cannot be used to underwrite personal auto policies. Example 3: Reporting channel: State regulators typically require use of the System for Electronic Rate and Form Filing (“SERFF”) database maintained by NAIC for formal submissions: https://login.serff.com/serff/ What’s coming down the road? We have seen examples of the dependence of applicable insurance regulations on individual state laws; the mechanics of model development requires understanding and working with these restrictions. Basic filing and disclosure, permissible model variables, the proprietary status of model detail, and the use of certain consumer information (e.g., credit scores, driving records) are all aspects of risk models whose successful execution depends on understanding the widely variable set of existing state regulations. Several authors have cited the need for a shift in the underlying regulatory structure of the industry from state-based to a national system, citing the inefficiency of the licensing process and the true interstate nature of today’s distribution system. A centralized federal insurance regulatory body would simplify interstate compliance by carriers, but would also introduce other complications. However, it appears prudent in the near-term for 3rd parties developing models to gain awareness of, and streamline, current requirements for regulatory compliance at the state level. Conclusion: There is a considerable additional value that the next generation of models will contribute to the commercial P&C vertical. Insurers and 3rd party developers have demonstrated the applicability of their models and data reports, offering competitive added value with standard risk scores adapted from the credit domain. However, promoting these products more broadly and expanding the product offerings themselves into cyber risk, commercial linkages, and various other tools for insurers, the insurance industry faces efficiency hurdles from our 50-state regulatory framework. With any regulatory centralization unlikely near term, 3rd parties thus need to gain working fluency in NAIC and in the SERFF database, anticipate state-level documentation and disclosure requirements, and attain a level of familiarity with state regulatory machines that enables the management of the interests of their clients with confidence. How Experian can help you Experian provides analytical services for Property & Casualty as well as other insurance product verticals. To enable you to assess claims risk at the time of policy application (or renewal), we either apply standard risk models or develop custom risk models to your underwriting and rate-setting processes. To help you guard against cyber fraud, false identity, and reputation risk, we offer specialty products as well. We also offer special purpose, custom analyses on request, and we sell curated commercial data to your standards as well. References: [1] Brookings Institute. paper on future of regulation- Grace & Klein [2] Insurance Information Institute: Regulation [3] Grant Thornton: ORSA requirements: Model Risk Management for Insurance Companies [4] Blueprint for a Modernized Financial Regulatory Structure, Dept. of Treas., 2008  

Today we are very proud to be taking the wrapper off the next generation of our flagship commercial credit management application, BusinessIQSM 2.0. To meet the ever-changing needs of our clients, we continue to grow and modernize with them.  This innovative and powerful analytical web-based application is designed for commercial enterprise and small-business risk management. From the new interface and side bar navigation to enhanced search and match technology, to judgmental and rules-based scorecards, all the way to custom model scores, Experian’s BusinessIQ 2.0 has something for everyone. Let Experian meet you where you are and take you to where you want to be. BusinessIQ 2.0 Overview In this video we highlight some of the key features of BusinessIQ 2.0. Learn more by going to:  

Experian has released the Experian/Moody's Analytics Main Street Report for Q4 2018. The report brings deep insight into the overall financial well-being of the small-business landscape, as well as providing commentary around what certain trends mean for credit grantors and the small-business community. Bucket 17Q4 18Q3 18Q4 Moderately Delinquent 31-90 1.68% 1.63% 1.68% Severely Delinquent 91+ 4.00% 3.40% 3.49% Bankruptcy BKC 0.16% 0.16% 0.16% The fourth quarter capped a second year of solid performance and growth for small-business credit, but there are signs that the period of moderation experienced during the past two years is over. Since the government shutdown has the potential to throw small-business lending a curve ball in the first half of 2019, the outlook for small-business credit is neutral. Conditions were positive in the fourth quarter, but this may not last long. Delinquency rates remained mostly stable, with pockets of weakness spread out among regions and industries, notably construction in the Plains. In addition to the 35-day shutdown, rising interest rates, destabilizing trade policy and slowing home-price growth are potential trouble sources that are already starting to impact some regions.  

I have been on the road meeting with clients at advisory events, forums, and industry thought leadership conferences, and what I continue to hear is a concern about the upcoming recession. The drivers of the next recession are up for debate but the consensus is that it is inevitable. The U.S. Economy is complex and the signals are mixed as to where the greatest impact will be felt. Protecting your business, whether consumer or commercial focused, is dependent on the stability and strength of your lending criteria and customer engagement practices. You want to protect your customers as well as your business in the case of a market stumble. You are laser-focused on making the best possible decision when reviewing credit applications and setting loan terms, however, financial situations change over time for both individuals and companies. This is especially true when a recession hits and unemployment begins to rise, consumers stop spending, and commercial delinquencies begin to rise. When these macroeconomic changes occur, the credit you have extended to your portfolio might be at under market stresses and at a stronger risk of nonpayment, and this can affect your business’s health and sustainability. By stress testing your portfolio, you can determine what may happen, when stresses are exerted, by a receding economy, on your portfolio. You can use credit information, macroeconomic data, and alternative data to build models that forecast what is likely to happen in the future and how stresses, will affect the ability for people or businesses to pay their bills. While larger regulated companies may be required to perform forecasting and stress testing, lenders of all size can benefit from the process. Gathering the Right Data for Accurate Stress Testing The accuracy of your stress test depends on the type and quality of data used for forecasting. Recessions are cyclical and likely to re-occur every few years, it is recommended that companies use historical data from the 2008 recession for analysis and to make accurate predictions. Young businesses may not have complete historical data going back to the 2008 recessionary time period. A partner like Experian can create look-alike business samples, from the vast holistic data, to simulate the likely impact of macroeconomic scenarios. For example, a financial services firm has been providing small business loans between $50,000 and $100,000 for the past three years and wants to predict future losses. To gather the data for loss forecasting, you need to create a business and product profile identifying loans or businesses with similar characteristics, to stress and forecast performance. These profiles are used to build a look-alike sample of businesses and loan products that look and perform like your current portfolio and will add the sample size and retro time periods needed to create a statistically viable analysis sample. Selecting a Forecasting Strategy Once you have the historic credit, macroeconomic, and alternative data on your portfolio or look-alike retro sample for modeling, you need to stress test the data. Most stress test analyses start with a vintage based analysis. This type of analysis looks at the performance of a portfolio across different time periods (Example: March 2007, March 2008, March 2009, etc..) to evaluate the change in performance and the level of impact environmental stresses have on the portfolio's performance. Once you have this high-level performance, you can extrapolate into the future performance of the portfolio and set capitalization strategies and lending policies. Identifying Loss Forecasting Outcomes Regulators and investors want to know the business is solvent and healthy. Loss forecasting demonstrates that your company is thoughtful in its business processes and planning for future stresses. For regional lenders that are not regulated as closely as large national or global lenders, forecasting shows investors that they are following the same rules as larger regulated lenders, which strengthens investor confidence. It also demonstrates effective management of capital adequacy and puts you on a level playing field with larger lenders. Companies with limited data can start with credit data for look-alike sample development and add historical data and alternative type data as they grow for a holistic portfolio view. Setting up Governance Business policies and macroeconomic stresses change over time, it’s essential to set up a governance schedule to review forecasting processes and documentation. Your stress testing and forecasting will not be accurate if you design it once and do not update it. Most companies use an annual schedule, but others review more frequency because of specific circumstances. Effectively Documenting Loss Forecasting The key element of loss forecasting is effectively documenting both sample and strategy taken in the evaluation of your portfolio. A scenario you might face is when a regulator looks at the analysis performed and you have selected sample data at the business level instead of the loan level, documentation should capture the explanation of why you made the decision and the understood impacts of that decision. While the goal is to have complete data, many companies do not have access to high-quality data. Instead of foregoing loss forecasting, the use of documentation to note the gaps and build a road-map for the data can be of great value. Here are additional key points to include in the documentation: • Data sources • Product names • Credit policies • Analysis strategy • Result summary • Road-map and governance schedule By creating a stress-test analysis strategy for forecasting loss, your company can make sure its portfolio and financial status remain as healthy tomorrow as they are today while maintaining transparency and investor confidence. The next recession is out there, this is a great time to strengthen processes for future successes.