Enhanced credit model provides most powerful tool yet for assessing mid-sized SME universe
Our approach to assessing mid-sized SMEs
ThinCats’ approach to creating bespoke funding structures relies on two core areas of expertise; industry leading data analytics using our proprietary credit model combined with regionally based credit teams experienced in SME underwriting.
Our credit model, called PRISM, assesses the likelihood of a business becoming insolvent. Using multiple data sources including accounts filed at Companies House, PRISM was created from modelling more than 2 billion data points covering every mid-sized SME that had traded since 2007 – around 200 metrics on over 750,000 businesses across 14 years.
We recently completed our third major upgrade to PRISM which makes it even more accurate in its ability to predict future insolvencies including an additional overlay called SPECTRUM that incorporates factors that are indicative of a business’s creditworthiness captured over the period since it last filed its accounts. This information is powerful at any point in an economic cycle, but in the current climate where the covid pandemic has impacted different sectors in different ways, it becomes particularly vital. Relying entirely on the most recent – almost certainly pre-pandemic –filed accounts could give a misleading picture of a business’s true financial strength once the pandemic hit the UK in March 2020.
The new version of PRISM considers over 50 financial, demographic and behavioral characteristics per business, which combine to determine its overall credit grade –ranked from 1 star (high insolvency risk) to 5 stars (lowest insolvency risk). The SPECTRUM score that sits alongside the star grading is derived from information shared with credit reference agencies by over 100 lenders. It captures monthly behavior on other credit obligations (arrears, defaults), current account income, expenditure and balances, and how quickly businesses are paying their bills.
SPECTRUM is presented as a set of traffic lights: Green means there are no warning signs of concern and underwriting can proceed with confidence that the PRISM star grading is an accurate representation of the credit risk of the business. Amber or Red warning flags indicate that caution or extreme caution is advised and that investigation into the factor(s) driving these flags should be carried out before proceeding with the loan.
As all ThinCats loans are secured, PRISM also rates each business on the recoverability of the security should the loan default. We use a padlock ratings system to denote whether a potential loan is well secured (5 padlocks) or is weakly secured (1 padlock).
The benefit to prospective borrowers and their advisers is that because this enhanced version of PRISM is even more accurate at identifying high-risk borrowers, a higher proportion of the mid-market universe achieves “lendable” risk grades, meaning we can lend to more applicants whilst being even more confident of the an indicative price provided soon after application.
When combined with the underwriting expertise of our regionally based credit teams who are empowered to make lending decisions, we can provide greater certainty for the borrower that, if we like a deal after our initial assessment, that position won’t change, as long as the necessary due diligence requirements are satisfied.
