Return to pre-pandemic lending risk analysis ‘misses key challenges’

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Alternative loansDigital bank

A report claims government support during the pandemic has created an artificially positive outlook for many businesses, which is now misleading in light of the economic challenges of 2022.

Image source: Katrin Herrling. co-founder and CEO of Funding Xchange

A return to a pre-pandemic approach to risk assessment could be wrong, according to a new report from Funding Xchange.

The report claims that the money injected into Britain’s small businesses by the government during the pandemic, which is slowly running out, arrears and defaults “sanitized”, preventing business failures that would have occurred in normal circumstances.

Building risk assumptions around event-based datasets such as arrears and defaults may therefore be “misleading” in the current environment according to the report, which says this will require a better understanding of business performance. actual business and free cash flow.

Funding Xchange cited Treasury statistics which revealed the number of insolvencies rose 40% year-on-year to June 2022, and said cash balances held by UK businesses were at their lowest level since the start of the pandemic.

The report then proposes other approaches to assess the risk profiles of companies.

These included assessing the credit profiles of directors themselves, with the report saying that while “business performance and cash balances are important, the last two years have also clearly shown that directors with a credit profile financial strength have been able to more effectively lead small businesses through the challenges”.

The report also encouraged a proactive approach to credit scoring.

Funding Xchange said “waiting for an increase in arrears and defaults before acting removes the possibility of affecting results” and that “early indicators are critical to understanding the trajectory of a lender’s portfolio and creating the window to proactively engage with customers before backlogs and defects occur”.

Funding Xchange is not alone in promoting a relatively pessimistic outlook for the future of UK businesses.

iwoca’s latest Small Business Expert Index reported that 77% of brokers say the possibility of a recession relates to 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% rise in borrowing costs.

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