The Evolving Nature of Risk Management

By Damon Dickens

In a rapidly changing world, having confidence in your risk-management system is critical. A dynamic, yet robust, risk-management framework ensures that we have the ability to target risk in our portfolios and can deliver what we promise, for our clients, our staff and our stakeholders. In the commercial finance world, being able to reinforce and adapt our risk- management processes and procedures is paramount, one way to do this is by utilizing technology to enhance and protect our offering.

Technology in Risk Management

Utilizing new technologies in account acquisition, portfolio management and workouts is critical to ensure we maintain a strong risk-management environment.

As a lender, having dominion of funds is fundamental for the smooth running of a factoring/asset-based lending facility. In the instance where a customer collection is not paid directly to the lender, we would either catch this from our ongoing contact directly with the customer or during our review of the client’s bank statements as part of the monthly management reporting package.

As an alternative to relying on clients to provide monthly bank statements, we have integrated with and have utilized a software, via a Fintech platform, (We use Finvoice, but there are several platforms out there dedicated to our industry) which allows for online, read-only encrypted access into our clients’ bank accounts (with their permission of course). This is advantageous for several reasons:

• We see the transaction in the account much faster than we would typically if we waited to receive a copy of bank statements a month or more after most transactions. Our reaction time is significantly reduced; the sooner we are aware of any problems, the sooner we can work on a solution
• The information is coming directly from the bank, so we can be sure that the transactions are bona fide, contrast this with PDF copies of bank statements sent directly from the customer, which can increase the risk of transactions/bank statements being edited or falsified
• Access is given to all bank accounts. We can view all accounts which the client operates, giving us a view of the whole picture of our client’s cash position, which helps us make informed decisions
• Parameters can be set so that certain transactions are highlighted immediately such as a reverse ACH (possibly indicative of a merchant cash advance loan), or large deposits for example.
• It reduces the workload for our clients. They don’t need to print-save-send their bank statements every month and email them over to us. Once the link is active it remains active until terminated.

We have seen the benefits of the system already; uncovering a large direct conversion of cash by one of our larger ABL clients within 48 hours of them receiving the payment directly. This allowed us to react quickly and ensure the payment was wired to us before it was spent! Without the real-time monitoring we would have uncovered the payment several weeks down the line, making our chance of recovery much smaller.

Portfolio Management Analytics

As portfolios grow, being able to effectively scale with our risk-management procedures becomes critical. A portfolio of 10 clients can be monitored very closely, with each client and each debtor base having lots of hands-on monitoring, however with a portfolio of 100 or 200 clients, this hands-on approach is unsustainable. Utilizing portfolio data integration and analytics software can help to target and pinpoint specific pockets of risk in the portfolio. This software does not replace our operating system where we manage our clients day-to-day, but rather sits on top of the operating platform and provides a further layer of risk management.

The software can be used to manage by exception, utilizing pre-defined criteria and risk scores to highlight which clients may need further analysis. We can also set specific trigger events, add periodic reviews and monitor our overall debtor or industry/sector exposure.

Some examples of how we have used the system as a tool to improve our enterprise-wide risk management:

• Constructed a high-risk portfolio of clients (as defined by our own internal criteria). This allows for greater focus on the clients which we believe pose the largest risk of loss to our business. The criteria for high risk can be personalized. For example, it may be:
• accounts with high or trending high dilution
• accounts with a high or trending high DSO
• accounts with changes of more than X to dilution or DSO
• accounts with high concentration
• accounts in arrears with their monthly reporting
• accounts that are out of formula
• Operates as a centralized database which lists all required periodic reporting from clients. This could be common items such as the standard monthly reporting package from clients to less frequent items such as inventory appraisals, field exam requirements or insurance renewals.
• Performing annual client reviews using pre-prepared templates in the system. This reduces the need to manually transfer the information from the operating system and reduces the likelihood of manual errors and saves time.
• The system can be utilized for automated portfolio reports, these can help deliver insightful management information across the business at a variety of levels, from Operations, Risk to Senior Management/Board level. As the saying goes: “What gets measured, gets managed.”

Portfolio management software can allow us to become more analytical and data driven and ensure that our risk-management resources and focus are allocated to the right areas.

Using Technology in the Acquisition Process

The acquisition process can be a critical time in the sales/underwriting process. Once an account has committed to your business, the time between due diligence and first funding should be minimized and as painless for the prospect as possible. That does not mean rushing a deal through underwriting and cutting corners, but in a competitive marketplace being able to close deals quickly, accurately, safely and efficiently is important. We have utilized a system in order to reduce this timeframe as much as possible.

The system offers a variety of benefits to both the prospect and the lender. It allows for a direct online application, which means no e-mailing of paper applications with a reduced risk of manual error from misspelled words or illegible handwriting. It can produce a standard set of legal documents to be electronically signed, with risk tools to create an audit trail showing the IP address of the user’s computer. It can allow for direct access into the prospect accounting software, which reduces the risk of manipulation of the numbers, ensures the information is up to date and ultimately (once the business is fully onboard as a client) makes the monthly reporting requirements easy to manage. Additionally, parameters can be set such that the system will automatically send you copies of invoices generated over a predetermined dollar value or will upload a new AR aging to you once a week for example. Furthermore, it can be combined with the bank account integration to provide a seamless transition from prospect to client.

Closing

As always, the above should be caveated in that, use of technology in risk management is not a replacement, but an enhancement for our tried-and-tested methods. It is a useful tool which can make us more efficient and highlight trends to give us a better understanding of our portfolio so that we can act proactively to manage situations, rather than reactively. It helps to expedite and optimize due diligence to close deals faster.

Technology and software will never replace ‘gut feeling’, and we should never abandon our prior experiences or existing relationships with clients. Technology can help us become more responsive to problems and more flexible with our solutions for clients. An early warning signal could prompt a telephone conversation or in-person visit to the client just before they become desperate enough to raise that fraudulent invoice or supply that fabricated financial statement.

At the fine margins of portfolio management, use of technology in the right way can be the difference between stopping a loss altogether or turning a potential loss into a manageable situation. The key, as always, is striking the right balance. When you lend money, you can rest assured that at some point, someone will try to take some of it from you – a dynamic technology solution helps to keep the wheels on so that you can focus time and energy where it is needed most.

Damon Dickens is the Vice President – Risk and Underwriting of Sallyport Commercial Finance, LLC. Damon was previously the Risk Officer of the Bibby Financial Services – Large Business Unit covering the Atlanta and Los Angeles offices. Prior to joining Bibby in the US in 2013, Damon worked for Bibby Financial Services in the UK, working in a variety of roles covering risk, audit, field examinations and underwriting. Damon holds a BSc (hons) in Mathematics, Operational Research, Statistics and Economics from the University of Warwick, a BSc (hons) in Accounting and Finance from the London School of Economics and an MSc (distinction) in International Banking and Finance from Liverpool John Moores University. Damon can be reached by phone at 832-939-9450 or via email at [email protected].