AR teams would give anything for a business equivalent of a FICO score. As it stands, they’re forced to rely on lagging indicators from agencies like D&B and Moody's to determine creditworthiness. These reports are inherently backwards-looking, leaving AR teams with massive blind spots in their Know Your Customer (KYC) and Know Your Business (KYB) processes.
This lack of real-time visibility exposes them to bad debt while limiting their ability to bolster top-line growth. Let’s take a look at why this is the case and, more importantly, how to fix it.
Where traditional credit management falls short
The traditional approach to business credit assessment is fundamentally flawed. It’s like trying to drive while looking through the rearview mirror.
This reliance on outdated data manifests in several key ways.
Static credit limits
One of the most glaring weaknesses in traditional credit management is the almost universal reliance on static credit limits. These limits tend to be established early in the customer relationship—often during the initial onboarding process—and then essentially remain set in stone. They might get a cursory review once a year, or a tweak after some major event. But more often than not, they’re left untouched.
This is problematic, because a customer’s financial health is constantly in flux. Market conditions shift, supply chains get disrupted, competitors emerge, and customer demand ebbs and flows. All of these factors, and countless others, can have a significant impact on a business’s financial stability. Yet, with a static credit limit, you’re essentially assuming that nothing will change. That’s a dangerous gamble.
Let’s say you onboard a startup and provide them with a modest credit limit. They then land a major contract, tripling their revenue. Their financial position has vastly improved, yet their purchasing power remains capped, leaving you both worse off. On the flip side, if their business declines, that same static limit exposes you to increased risk by allowing purchases based on an outdated assessment.
In either case, a fixed credit limit creates a disconnect between the credit extended and the actual risk assumed. This can stifle growth by limiting healthy customers or increase losses by overextending credit to struggling ones.
Manual monitoring bottlenecks
The sheer impracticality of manual monitoring at scale is another major drawback. Even with diligent credit limit reviews, keeping tabs on every customer’s financial well-being by hand is a losing battle.
Your team spends endless hours sifting through data (financial statements, payment histories, news articles, industry reports, etc.), trying to identify potential red flags. But finding the signal within all this noise is nearly impossible. And even if they do manage to identify a potential issue, it’s often too late to intervene. The damage is already done.
Walking the risk/reward tightrope
AR teams are well-versed in the push and pull of managing risk without choking sales growth. Nobody wants to turn away paying customers, but ignoring red flags leads to far worse consequences: unpaid invoices, mounting bad debt, and even legal action. In fact, Wakefield research reveals that 64% of C-level executives have had an invoice dispute result in a lawsuit or the threat of one.
Rapidly changing circumstances
Perhaps the most significant challenge is the speed at which a business’s financial circumstances can change. A seemingly stable operation one month could be facing serious financial difficulty the next. They might lose a major contract, encounter a sudden spike in operating costs, or be hit by any number of “black swan” events. If your risk assessments are built upon reports that are weeks or even months old, you’re especially vulnerable.
The solution: Proactive monitoring, powered by AI
As far as we know, a business FICO score isn’t coming anytime soon. So, how can AR teams escape this reactive cycle?
Here’s what you need to do.
Leverage AI-driven insights from external data
The first step is equipping your finance and revenue teams with the right tools, the most powerful of which being AI assistants. These are sophisticated systems that can sift through massive amounts of information—news articles, industry reports, regulatory filings, social media sentiment, and much more—to provide a level of intelligence that traditional credit reports simply can’t match. Being able to ingest all this information in real time allows AI assistants to alert you before customers start missing payments.
Embrace dynamic credit limits
Next, ditch fixed credit limits in favor of a more dynamic, proactive approach. Combine internal behavioral patterns (payment history, order frequency, etc.) with up-to-the-minute external data to automatically adjust credit limits. If a customer exhibits concerning behavior (e.g., consistently late payments) or negative industry news surfaces, their credit limit and payment terms should be automatically reassessed.
Improve cross-departmental communications
AR can’t shoulder the burden of credit risk alone. They need help from other departments as well, which requires strong collaboration and information sharing. To avoid communication breakdowns, automatically share critical updates on customer credit issues with your revenue teams (AEs, AMs, and CSMs). This prevents sales from being left in the dark about financial red flags. Integrating AI-driven notifications into your CRM provides a single, up-to-date view of customer information for all involved.
Expand your data horizons
Don’t limit yourself to traditional reports like credit bureau data. Get the full picture by gathering data from customers (with appropriate permissions) and leverage third-party tools that analyze a wider range of public and proprietary information. Consider social media sentiment, supply chain data, and industry trends—the more data at your disposal, the better your insights will be.
Automate preventative measures
AR automation is gaining traction for a reason: it prevents costly errors while boosting efficiency. The market reflects this, with projections showing growth to $6.4 billion by 2033 (a 9.7% CAGR from its $2.8 billion valuation in 2024). Capitalize on this trend by implementing automated rules within your POS and CRM systems to block new orders from customers with unresolved credit issues or high-risk behavior. Doing so will prevent potentially damaging transactions from hitting your books.
Provide dynamic payment terms
Waiting for customers to default is a lose-lose scenario. Instead, do what’s best for both of you by proactively offering flexible payment plans and extended terms to those experiencing financial headwinds. Along with significantly increasing your chances of recovering receivables, this builds valuable goodwill during challenging times. We’ve seen many cases in which this turns a potential write-off into a recovered account.
Turn risk mitigation into a strategic advantage
Don’t let retrospective credit management hold you back. Take control of your credit risk with AI-driven intelligence and dynamic strategies that hit the risk/reward sweet spot. Chat with Stuut today and let us show you how our AI assistants can transform risk into opportunity.