Offering financing solutions can be an excellent growth and customer loyalty lever for businesses. However, if not well managed, a financing activity can also quickly become a significant risk factor, especially in the event of payment defaults or deterioration of the solvency of financed customers. For companies that are starting to offer financing or wish to sustain this activity, it is therefore essential to put in place the right safeguards to reduce risks. What are the key points of vigilance and the best practices to adopt? Discover our 5 key tips for offering financing to your customers with complete peace of mind.

Properly Qualify Your Customers to Limit Defaults

The first step in managing risk when offering financing solutions is to properly qualify your customers upfront. The objective is to ensure their creditworthiness and ability to meet their payment commitments.

Collect Key Information About the Customer

To assess a customer's reliability, it is essential to collect as much information as possible about them during the application process:

• Their identity: name, date of birth, address, etc.
• Their employment situation: type of contract, seniority, employer name, etc.
• Their income: net monthly salary, other potential income, etc.
• Their family situation: married, children, etc.

Don't hesitate to ask for supporting documents to verify this information (ID, pay stubs, tax returns, etc.). The more you know about your customer, the better you can assess their reliability.

Enrich the Analysis with External Data

To complete your analysis, you can also rely on external data:

• Payment incident files such as the Chex Systems consumer report
• The TeleCheck database to verify there are no returned checks or overdrafts
• Business credit reports from Dun & Bradstreet, Experian, or Equifax
• Other credit scoring and risk assessment databases

These tools will give you a more complete view of the customer's risk profile, beyond their self-reported situation.

Define the Right Amount and Term

Finally, once the risk profile is established, qualifying the customer also involves defining the right financing amount and commitment term. It is important to properly size the financing granted according to the analyzed repayment capacity.

It is better to be more selective on amounts and terms, even if it means not financing certain customers, rather than being too permissive and exposing yourself to default risks. Qualifying customers is a key step in finding the right balance between business development and risk management.

Define Strict Eligibility Criteria for Financing

Beyond individual customer qualification, it is important to define general eligibility criteria and strictly adhere to them when granting financing. These criteria will allow you to filter applications upstream and only process those that fit within your risk policy.

Set Acceptance Thresholds on Key Indicators

Your eligibility criteria should cover the main risk indicators:

• Applicant age: for example, only finance people over 18 and under 70
• Employment situation: only finance confirmed employees, with more than 6 months or 1 year seniority for example
• Income level: define a minimum income threshold, or a maximum debt-to-income ratio not to exceed
• Stability: have criteria on length of residence at the same address, job stability, family situation, etc.

By setting thresholds on these indicators, you ensure that you only process the least risky applications.

Segment Your Approval Policy by Customer Profile

You can also go further and define different eligibility criteria according to customer profiles and risk levels:

• Have more flexible criteria for your loyal customers with a good history with you
• Be stricter on first-time borrowers or profiles with lower incomes
• Define specific grids for students, retirees, self-employed, etc.

The idea is to adapt your selectivity according to the level of risk, while remaining within the overall framework of your approval policy.

Hold Teams Accountable for Compliance with Criteria

Finally, for your eligibility criteria to be truly effective, it is essential to train and empower your teams who are in contact with customers and who put together the applications:

• Organize regular training on the approval policy and rules to be followed
• Implement controls on file compliance
• Establish incentives and penalties to encourage best practices

It is by being uncompromising on the application of criteria at all levels that you will really succeed in reducing your risk exposure.

Implement a Robust Credit Risk Analysis Process

Having an approval policy and eligibility criteria is good, but it is not enough. To truly master your risk, you must also thoroughly analyze each financing request. This is the whole point of the credit risk analysis process, which should allow a precise assessment of each application.

Collect and Verify Required Supporting Documents

The first step in credit analysis is to gather all the necessary supporting documents to review the application:

• Valid government-issued ID
• Proof of address dated within the last 3 months
• Pay stubs for the last 3 months
• Bank statements for the last 3 months
• Previous year's tax return
• Current bills and credit accounts

The completeness and freshness of the documents collected are essential to have a true and up-to-date view of the customer's situation. Each document must then be verified and validated: authenticity of the ID, consistency of the various documents, undeclared current loans, etc.

Analyze Solvency and Repayment Capacity

Once the file is complete, you need to conduct a detailed analysis of the customer's creditworthiness and repayment capacity. This involves:

• Studying income (salary, bonuses, other income) and its regularity over time
• Studying expenses (rent, current loans, regular charges) and residual income
• Calculating the debt-to-income ratio before and after the new financing
• Analyzing the bank account (functioning, possible incidents)
• Taking into account the credit risk assessment score

The objective is to challenge the customer's situation, identify any potential weaknesses and ensure that the requested financing is appropriate.

Make a Reasoned Financing Decision

Based on this analysis, you must finally make and justify a financing decision:

• Acceptance of the application as is
• Acceptance with modifications (amount, term, rate)
• Reasoned refusal of the application

Each decision must be justified and documented. In case of refusal, it is important to pedagogically explain the reasons to the customer. In case of acceptance, the financing offer must be formalized and the contract signed by the customer.

A rigorous and systematic credit analysis process will allow you to make the right financing decisions and greatly reduce the risk of future defaults and litigation.

Ensure Regular Monitoring of Outstandings and Customer Solvency

Granting financing to a customer does not mark the end of the risk management process, quite the contrary. To protect yourself from defaults, you must continue to monitor your customers regularly after approval. The idea is to have continuous monitoring of your outstandings and your customers' situation to detect any deterioration as early as possible.

Monitor Payment of Installments

The first level of monitoring consists of verifying that each customer pays their installments on the scheduled date. This involves:

• Keeping an exhaustive and up-to-date schedule of all expected monthly payments
• Quickly following up with the customer in case of late payment, from the first day of delay
• Blocking usage and new financing in case of default
• Applying late penalties to encourage customers to catch up

The faster your reaction in case of default, the more likely you are to recover the amounts due without going to litigation.

Monitor Changes in Customer Solvency

Beyond the payment of installments, you must also monitor changes in your customers' situation and solvency over time. Several points of vigilance:

• Annually verify employment status and income (via a new collection of supporting documents)
• Monitor potential overdrafts on the bank account and listings in Chex Systems
• Be attentive to changes in situation (divorce, job loss, health problems, etc.)
• Regularly recalculate the debt-to-income ratio and compare it to the initial ratio

This monitoring over time will allow you to identify vulnerable customers and implement preventive actions before defaults occur (loan restructuring, pause in payments, etc.)

Segment Your Monitoring and Collection Actions

Finally, to optimize your outstandings monitoring, consider segmenting your actions according to the profile and risk of customers:

• Light monitoring for good payers with stable solvency
• Enhanced monitoring for customers in temporary difficulty or with recurring defaults
• Collection and litigation processes for permanently impaired customers

It is by adapting the level of monitoring that you will succeed in allocating your resources efficiently, by focusing on the riskiest customers.

Monitoring outstandings should not be neglected. It is by being proactive and reactive on this subject that you will manage to contain your default rate and your cost of risk over time.

Rely on Specialized Risk Management Tools and Software

To put all these common sense tips into practice, there's nothing like a good IT tool. Rather than working with Excel files, it is highly recommended to equip yourself with software specialized in customer risk management. This will make you gain in productivity, reliability and efficiency in managing your financing activity.

Automate the Approval Process and Application Analysis

A customer risk management software will first allow you to automate and industrialize your financing approval process:

• Configuration of your approval policy and eligibility rules
• Guided input of financing applications with consistency checks
• Automatic analysis of supporting documents (OCR, data extraction)
• Instant calculation of solvency ratios and credit scores
• Automated decision-making based on your risk policy

By automating these tasks, you save precious time while ensuring the systematic application of your rules on all applications.

Centralize Customer Data and Documents

The software will also be used to centralize all data and documents related to your financing activity:

• Unique customer database with all the KYC information
• Electronic document management system (DMS) to store supporting documents
• History of financing granted, installments, and payment incidents
• Tracking of customer solvency and risk indicators over time

By having all the information in a single tool, you ensure data reliability and facilitate collaboration between teams.

Monitor Outstandings and Automate Alerts

Finally, the software will allow you to easily monitor your outstandings and automate alerts:

• Real-time view of current outstandings and payment schedules
• Automatic reminders in case of payment delay
• Proactive alerts on deteriorating customer solvency
• Prioritized lists of customers to monitor or contact

These features are invaluable in saving time on daily monitoring and anticipating potential defaults.

Specialized software has become indispensable for effectively managing customer risk. It is a necessary investment to secure your financing activity over the long term.

In Summary: The Key Points to Remember

Offering financing can be an excellent growth driver, but it is essential to properly manage the associated risks. Here are the 5 key points to remember:

1. Properly qualify customers before granting financing
2. Define and strictly apply eligibility criteria aligned with your risk policy
3. Conduct a rigorous analysis of each financing application
4. Regularly monitor outstandings and customer solvency
5. Use specialized software to automate risk management

By applying these best practices, you will be able to develop your financing activity with peace of mind and keep your risks under control over time. The initial effort invested in structuring your process will be quickly paid back!

Is your company looking to offer financing options to your customers? Do not hesitate to contact our experts to discuss your project and discover our dedicated solutions!