Receivables finance and invoice factoring markets across Europe are balancing economic challenges with heightened regulatory scrutiny. While these challenges may seem to stifle demand, the growing need for liquidity and flexible capital presents fresh opportunities for lenders. Naturally, this uptick benefits factoring businesses and their client management teams—but it also raises red flags for risk teams. Fraud risks, erratic payment behaviours, and portfolio instability are just a few of the headaches they must tackle. That’s why more and more businesses are waking up to the value of a risk-based approach to portfolio management.
Prioritising high-risk accounts based on key indicators doesn’t just streamline operations—it can drastically cut down on bad debt. Some markets, such as the UK, have already embraced this strategy, while others are just starting to tap into its potential with the support of sophisticated risk management software.
In this article, we’ll explore how adopting a risk-based approach sharpens decision-making, boosts operational efficiency, and strengthens client relationships by zeroing in on the areas that need attention most.
What is a risk-based approach to risk management?
At first glance, suggesting businesses adopt a risk-based approach to risk management might seem redundant—shouldn’t all risk management be ‘risk-based’? In practice, though, this isn't always the case.
A true risk-based approach focuses on accounts that present the highest risk, allocating resources accordingly. Instead of spreading attention evenly, businesses focus on preventing losses where the stakes are highest, helping safeguard financial stability.
Advanced tools like Lenvi Riskfactor have been game changers here. Our solution uses real-time analysis of risk indicators—including commonly used indicators such as debt turn, dilution, and exposure, alongside more sophisticated indicators that dig deeper into buyer payment behaviours and client funding patterns. Using a combination of risk metrics provides deeper insight to potential issues enabling client managers to act quickly and tackle issues before they spiral. Minimising the chances of defaults and financial losses in the process.
While this approach sounds like common sense, many businesses are only just starting to embrace it fully. In certain markets, it has already become standard practice – such as in the UK where 95% of the receivables finance market leverage Lenvi Riskfactor to drive a risk-based approach across their factoring business. By leveraging cutting-edge technology and adapting processes, businesses are ramping up efficiency and tightening risk controls.
Virgin Money case study
Read how Lenvi Riskfactor supports Virgin Money's risk-based approach
How does a risk-based approach differ from traditional risk management?
Traditionally, risk and client management teams often worked in silos. Client managers would focus on maintaining relationships with limited visibility into risk, while risk teams analysed data and flagged concerns after issues had already surfaced.
A risk-based approach, however, breaks down these silos. It fosters collaboration between risk and client management teams, ensuring they utilise the same data and can prioritise high-risk clients together. This saves time through quicker responses to identified issues and, overall, enables a more proactive, integrated approach to managing risk.
Key benefits of a risk-based approach
Flexibility: One of the most significant advantages is increased flexibility. Instead of applying the same level of scrutiny to every client, you can direct more attention toward those with higher risk.
For example, traditional models might require annual audits for all clients, regardless of performance. With a risk-based approach, high-risk clients get more frequent audits, while low-risk ones are reviewed less often. This lets businesses scale operations without compromising on risk management.
Optimised resource allocation: The flexibility also helps optimise resource allocation. By tailoring your processes to each client’s risk level, you ensure that resources go where they’re needed most. This improves efficiency and cuts down unnecessary costs.
Agility: With real-time data and advanced analytics, businesses can adjust strategies quickly as client circumstances change. This agility helps them respond faster to emerging risks, staying ahead of potential issues.
Stronger client relationships: Giving client managers access to risk data strengthens client relationships. With risk insights in hand, client managers, client operations, credit control, and survey teams can engage in more meaningful conversations with clients. They can proactively address concerns before they escalate into major problems, identify additional financial products that may be more suitable for specific needs, and determine when existing solutions are no longer adequate. This not only reduces risk but also fosters the trust and transparency that are foundations for lasting relationships.
Practical tips for implementing a risk-based approach
If you’re ready to adopt a risk-based approach, here are a few steps to smooth the transition:
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Leverage technology: Invest in an advanced risk management system like Lenvi RiskFactor. This will provide real-time visibility into your portfolio and help you track key indicators, ensuring timely intervention where it’s needed most.
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Set clear risk criteria: Establish specific criteria for identifying high-risk clients. Traditional risk indicators such as debt turn, credit notes, and dilution, and more detailed metrics like payment behaviours and facility utilisation should be part of your evaluation process to ensure consistency and accuracy in risk assessment.
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Develop adaptive policies: Move away from one-size-fits-all policies. Develop flexible approaches that allow for more frequent reviews of higher-risk clients, while scaling back monitoring for those with lower risk. Keep it adaptable for changing circumstances.
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Collaboration, collaboration, collaboration: Ensure that risk and client management teams work together using the same data. This collaboration improves risk identification and management while enhancing communication across teams.
Conclusion
The global invoice finance and factoring landscape is grappling with the challenge of balancing scale, risk, and efficiency amid ongoing turbulence. To thrive, lenders must evolve—and with them, their risk management strategies must advance too. For businesses not fully leveraging a risk-based approach, now’s the time to invest in the technology and processes that will keep you ahead of the game.
By continuously monitoring data, analysing risk indicators, and prioritising high-risk accounts, you can proactively mitigate risks while building stronger client relationships.
Now’s the time to embrace dynamic, agile risk management. Book a demo with us today to discover how Lenvi Riskfactor can help your business stay ahead of the curve.
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