Behind the Limit: How We Calculate Credit Risk

Created by Amy Sara Price, Modified on Thu, 24 Jul at 5:37 PM by Amy Sara Price

Objective:
To provide users with a clear understanding of how Trade Shield calculates credit limit recommendations using the Risk Adjustment Framework and how to apply this knowledge to make informed credit decisions.

1. Introduction

Trade Shield offers a data-driven approach to managing customer credit by calculating recommended credit limits through its Risk Adjustment Framework. This training manual outlines the components, calculations, and actions you can take when reviewing or overriding a recommendation.

2. Key Terminology

Customer 360: The Trade Shield interface showing customer details.
Credit Limit: The amount of credit extended to a customer.
Utilisation: How much of the current credit limit a customer is using.
Recommended Limit: A system-generated suggestion based on data and risk models.
Maximum Limit: The upper threshold based on the customer’s affordability.
Payment Risk: The likelihood of being paid within agreed terms.
Default Risk: The likelihood of future default (6–12 months view).

3. Customer Profiles: Existing vs. New

Existing Customers:

Calculations are based on historical behaviour and credit utilisation.
Payment and default scores are assessed.
Percentage multipliers are applied to current credit limits.

New Customers:

If no prior Trade Shield data exists we may not have a payment risk
Recommendations are based on default score only if we don't have a payment risk. But if we do we will use both
A portion of the maximum limit is allocated based on risk.

4. The Calculation Process

Step 1: Check Business Status

If status is invalid (e.g., deregistered), a zero recommendation is issued.

Step 2: Determine Maximum Limit (Affordability)

Based on:
- Turnover from financials, BEE certs, or bank statements
- Percentage of spend a customer can afford with you (after fixed costs)

Step 3: Apply Risk Scores

Two main scores:
- Payment Risk: Short-term behaviour vs. your terms
- Default Risk: Future projection based on industry, directors, and performance

Step 4: Use the Scorecard Matrix

Framework includes Low, Reduced, Medium, Elevated, High, Very High levels
Example: A low payment risk and medium default risk may result in a 50% increase

Step 5: Apply the Increase to Current Limit

E.g., Current Limit: R80,000; Score Result: 50% increase → New Limit: R120,000

5. Behaviour-Based Triggers

Recommendations are updated when:

A customer exceeds their limit
Behaviour changes (e.g., slower payments)
Business status updates
Usage patterns shift

Daily checks are performed, but limits only change when triggered by data.

6. Reviewing or Overriding a Recommendation

You can choose to accept or override a recommendation.
Options include:
- Requesting updated financials via the platform
- Adjusting the customer’s terms or limits manually

Tip: Use the built-in credit limit review workflow to send applications to customers.

7. Supporting Tools & Features

Pop-up Banner: Promotes training registration.
Live Chat: Available for support during workflow reviews.
Audit Trail: See how recommendations were derived.
Workflows: Different for new buyers vs. existing customers.

8. Understanding Blue-Chip or High-Value Customers

Larger companies may have higher payment risk due to internal processing delays.
Understand their AP process to avoid misinterpreting risk scores.
Map out how invoices flow through the client’s organisation to Treasury.

9. Risk Models Available

Conservative: Minimal exposure
Intermediate: Balanced approach
Aggressive: Growth-focused (higher exposure tolerance)

Your account manager can adjust the model used based on your risk appetite.

10. Summary

Trade Shield’s Risk Adjustment Framework combines affordability data, risk behaviour, and historical insights to recommend appropriate credit limits. By understanding how the calculation works, teams can:

Proactively manage credit exposure
Identify growth opportunities
Improve credit policy alignment