Mid-Year Review: AI-Driven PAYCE® Score Warns Before Delinquent Payments

Stop us if you’ve been hearing this lately: the economy is deteriorating in 2022 due to 40-year high inflation, disrupted supply chains, and rising interest rates. If history is any indication, the next natural step will be a wave of company bankruptcies as increasing operating expenses squeeze margins and higher rates increase interest burdens. Unsecured creditors are massively exposed to bankruptcy write-downs that they could otherwise see coming with a little bit of guidance.

When financial statements are unavailable, credit and finance professionals have long relied upon monthly invoices or trade payment data to detect financial stress in private companies. CreditRiskMonitor fills a void in the market with our AI-driven PAYCE® score, a model developed with a deep neural network to learn complex payment patterns and deliver scoring that is far more accurate in bankruptcy prediction than traditional payment-based markers such as Dun & Bradstreet’s PAYDEX® score.

CreditRiskMonitor is a B2B financial risk analysis platform designed for credit, supply chain, and other risk managers. Our service empowers clients with industry-leading, proprietary bankruptcy models including our 96%-accurate FRISK® score for public companies and 70%-accurate PAYCE® score for private companies, and the underlying data required for efficient, effective financial risk decision-making. Public company coverage comprises more than 57,000 businesses worldwide, totaling $69.3 trillion in corporate revenue compared to global GDP of $85.9 trillion. Additionally, private company coverage includes information on millions of businesses the world over. Thousands of corporations around the world – including more than 35% of the Fortune 1000 – rely on our expertise to help them stay ahead of financial risk quickly, accurately, and cost-effectively.

PAYCE® Score Bankruptcies

The 70%-accurate PAYCE® score predicts the level of financial distress for private businesses over the course of the coming 12 months. The model uses both a company’s past payment performance and U.S. federal tax liens if they are available. CreditRiskMonitor currently collects files of trade payments in excess of $2.5 trillion annually through our Trade Contributor Program. Here’s why:

  • Monthly payment performance is more predictive of financial stress in private companies than in public companies, given their lack of access to capital markets
  • Federal tax liens are also a useful signal given these legal claims have an interest in all property and financial assets when a tax debt is not paid and can signal grave liquidity issues

In the first six months of 2022, many private companies that filed bankruptcy exhibited payment patterns, measured by the Days Beyond Term (DBT) Index, which were either prompt or slow. One would expect delinquent payment behavior to be more prevalent in smaller private companies, but few showed such patterns and only in the final months before filing bankruptcy. Conversely, the PAYCE® score signaled high risk for six months or longer in the nine examples shown below, which gave counterparties time to reduce exposure:

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All private bankruptcies showed a high-risk PAYCE® score before the DBT Index signaled trouble and all had a PAYCE® score of “1” or “2” prior to their respective filing dates.
All private bankruptcies showed a high-risk PAYCE® score before the DBT Index signaled trouble and all had a PAYCE® score of “1” or “2” prior to their respective filing dates.

While certain bankrupt companies did eventually show delinquent payments prior to filing, several entities did not, including Home Products International, Inc., Burnside Services, Inc., Little Washington Fabricators, Inc., Balanced Energy Oilfield Services Inc., and Park Supply of America, Inc. Since more than half of bankrupt companies didn’t show delinquent payments, that further supports the value of the PAYCE® score.

High-Risk PAYCE® Scores

Looking forward, the PAYCE® score has identified many other high-risk companies with varied payment behavior patterns. For example, Central Freight Lines, Inc. has shown gradual deterioration in its DBT Index, while the PAYCE® score has been consistently weak throughout the period. Similarly, Eckert Cold Storage Company has been showing prompt to slightly slow DBT Index patterns, while the PAYCE® has consistently signaled high risk. These two companies have outstanding federal tax liens, among other companies listed below, which frequently overlaps with financial stress.

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Companies show diverse ranges of DBT Index patterns that make it difficult to identify financial stress, whereas the PAYCE® score demonstrates reliable performance.
Companies show diverse ranges of DBT Index patterns that make it difficult to identify financial stress, whereas the PAYCE® score demonstrates reliable performance.

Rather than reviewing DBT Indexes and investigating individual trade payment records, the artificial intelligence of the PAYCE® score helps risk professionals identify financial distress faster. The PAYCE® score also assists users to focus their attention on the highest risk companies, even if they appear to be a low risk at face value. In fact, many subscribers have been using our bankruptcy models with API integration to automate processes and create workflow triggers, including credit reviews and credit extensions.   

From a macro perspective, the private company bankruptcy tally diminished to a multi-decade low in 2022, but that pattern appears set to reverse course. Three core drivers include SBA PPP loans that ended in May 2021, increasing operating and financing expenses, and intensifying recession risks. The best solution is to prepare your company with the assumption of higher counterparty bankruptcies, informed by the highly accurate PAYCE® score, going forward. 

Bottom Line

The PAYCE® score continues to expand total company coverage and improve accuracy as the size and scope of trade contributors grow. With the PAYCE® score providing a substantial uplift compared to traditional trade payment analysis, more and more risk professionals are adding the bankruptcy model into their workflows and processes. In fact, you can gain free access to our trade payment data, PAYCE® scores, and other risk analytics by joining the Trade Contributor Program. 

Contact CreditRiskMonitor to learn how you can obtain these no-cost service benefits so you can stay ahead of the next wave of company bankruptcies.