Artificial Intelligence Takes On Risk Of Invoice Non-Payments

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Fear is holding back small businesses from trading internationally, according to a report from HSBC late last year. Specifically, a lack of international business knowledge and experience has small suppliers reluctant to step onto the global stage.

Those fears aren’t necessarily unfounded, either. Stepping onto the international market means exposure to new types of risk, including the risk of non-payment from a foreign, unfamiliar corporate client. Euler Hermes is just one company aiming at this space, providing businesses with trade credit insurance. Earlier this month the company launched a partnership with analytics-as-a-service company Flowcast to integrate artificial intelligence into the trade credit insurance process.

James Daly, CEO at Euler Hermes Americas, told PYMNTS why technologies like artificial intelligence (AI), data analytics and APIs are now critical not only for helping trade credit insurers, but for providing peace of mind (and stronger cash flow) for global suppliers.

“Anytime a business engages in a transaction with another business, where cash is not required up front as the form of payment, it runs the risk that it might not be paid,” warned Daly. He added that an estimated 80 percent of businesses trade on open terms — that is, they don’t require payment up front and, in some cases, may allow their corporate customers to pay 90 days or longer after receiving their order.

“These businesses take a risk every time they grant credit to their customers,” he explained.

If a business doesn’t pay, a small supplier is hard-pressed to make up for the lost money. Late and non-payment is a global issue, with regulators in the U.K., Australia and elsewhere taking up the issue as more SMEs lose cash as their invoices go unpaid. According to Daly, without insurance, a supplier is forced to make up for this lack of cash with additional sales.

“If a customer defaults on a $100,000 invoice and the business that is looking to get paid has a profit margin of 5 percent, that business would need to sell an additional $2 million to make up the lost cash flow,” Daly said. “For companies, particularly smaller ones that operate with tight cash flow and on small profit margins, even one unpaid invoice can be devastating and could put them out of business.”

For any company, holding onto capital is key to remaining successful on the global stage. The Association of Financial Professionals’ (AFP) 2017 Risk Survey found that 60 percent of businesses identify maintaining adequate liquidity as their top strategy to reduce geopolitical risks of the global market. Trade credit insurance, the AFP said, is just one way businesses can maintain that liquidity, with analysts noting that, by taking out this type of insurance, suppliers can extend payment terms with their buyers a bit longer.

“This can provide a competitive edge in tough markets and help retain clients,” the AFP’s report concluded.

It’s the risk of non-payment that led Euler Hermes to develop an SME-specific trade credit solution — the first of its kind, the company said — which rolled out last year. And as businesses continue to prioritize working capital optimization as a strategic initiative for growth, technologies like AI, said Daly, can offer more accurate ways to finance a small business.

Through their partnership, Flowcast will deploy its data analytics and AI capabilities to underwrite Euler Hermes’ insurance solution, using invoice-level data to predict metrics like probably of default or expected time for a company to pay its invoice.

These are complex metrics, however. AI and an API, the executive noted, allow “for real-time credit decisions and almost immediate pricing adjustment based on the quality of the debt.”

Data is critical to linking small businesses with new funding. APIs today have become a key way for FinTech companies to collaborate and share rich, high-quality data; for SMEs, that means less risk for financiers, too.

“Advanced technology,” he continued, “combined with our credit risk experience allows FinTech companies to market additional and secure financing to their customers.”

Advances in technology are propelling the trade credit insurance industry, Daly explained.

“Small businesses have always been aware of the risk of non-payment, but are only now starting to become aware that there are affordable and easy tools to help them mitigate risk, while at the same time grow their companies,” he said, adding that “over the next few years, as technology becomes easier to access and integrate, these tools will become even more accessible to the SME market.”