By Craig Evans, Head of Business Development, Graydon UK Limited
One of the principal long-term impacts of the global economic downturn is an ingrained distrust of risk. As the UK edges out of recession, many companies and senior executives still exercise extreme caution. Risk-taking was, after all, one of the principal causes of the credit crunch in 2008. But now, six years on, continued risk aversion represents a major barrier to progress. Now is the time for UK Plc to rediscover its ‘risk positivity’, explaining that a healthy appetite for credit risk can be a catalyst for business growth and competitive advantage.
Throughout history, the virtues of risk have had some fairly illustrious proponents. From Virgil to Sigmund Freud, the ‘who dares wins’ philosophy has been variously expounded and championed, although is perhaps most memorably articulated by American writer and filmmaker Will Rogers, who reasoned: “Why not go out on a limb? That’s where the fruit is.”
Understandably, in the immediate aftermath of 2008 such a view was anathema to those businesses and individuals hit hard by the economic downturn. As banks went bust and companies folded, risk appetite shrank into risk aversion, and businesses battened down the hatches in an attempt to protect themselves from further exposure. A prime example was the UK construction industry, which became one of the main victims of the recession as house prices dropped, mortgages stalled and plans for new housing and commercial buildings were shelved. Indeed, insolvency figures show that construction and property firms account for 23% of UK businesses forced into compulsory liquidation in recent years.
But the excessive caution that has defined the construction industry’s response to the recession has hindered rather than helped the recovery process. We know that trade credit is still the largest form of finance available to SMEs, but tight controls on credit lines have prevented customers from using this type of finance for growth.
In the post-recession landscape, companies therefore need to reassess their relationship with risk. In the construction industry in particular, increased credit limits can enable companies to take on more customers at higher margins and accelerate business growth. And while this approach may sound radical, it is by no means reckless – it is in fact a form of credit management that helps companies increase their market share without overextending their credit lines or capabilities.
The credit scoring system pioneered by Graydon UK Limited is designed to help clients control risk while using it to create a robust strategy for growth. With each client, we take a range of the client’s customers over a 12-month period; we assess which have fared well and which have fared badly and use this information to predict future performance. Armed with this analysis, we then calculate the client’s optimum credit risk in light of these statistically-projected future scenarios.
Typically, this kind of scoring system is used to reduce exposure (with companies seldom taking on more than 30% risk); but we use it to help companies embrace risk by extending credit limits to those customers we identify as ‘low risk’, thereby increasing customer volume and overall credit growth. For one client in the construction sector, we recently established risk thresholds based on our data modelling which promised to stimulate market growth of £7million.
These fundamental shifts in strategy, however, require courage and forward-thinking among Board members and senior management. Yes, companies will take on more debt this way; but if they understand the risk, and if they can quantify what the risk will deliver back into their business, it can represent a shrewd move that will provide significant competitive advantage. As Simon Howell, Head of Credit at Biffa Waste Services Ltd, remarks:
“Understanding the risk you are taking in the marketplace allows control of that risk. Having a method of assessing this accurately is the key to unlocking trading opportunities without compromising the financial objectives of the business. It enables market leaders to lead.”
As buoyancy returns to the UK markets, those companies that remain entrenched in cautious recessionary mindsets will lose out to those that adopt bolder, more positive approaches. The fruit is indeed “out on a limb”; better to attempt to grasp it, than remain grounded for fear that the branch may break.