Magazine article Business Credit

Analyzing Credit Information: What You See Isn't Always What You Get

Magazine article Business Credit

Analyzing Credit Information: What You See Isn't Always What You Get

Article excerpt

When selling products or services on credit, the aim is to avoid customers not considered "creditworthy." Obviously, this is a subjective word - each of us uses different criteria to determine if a would-be client is a good credit risk. Just as "beauty is in the eye of the beholder," two different credit managers can draw vastly dissimilar conclusions about a customer, even if they have analyzed the same credit reports and payment histories.

Like medicine, granting credit is an inexact exact science. Differences of opinion within the profession occur for a variety of reasons, such as the industry itself, sales volume and how much a firm needs the customer's business. It might be easy to establish arbitrary standards (i.e. refusing any retail credit applicant that has any "SLOW90" ratings), but in practice that would probably place your company at a competitive disadvantage.

In business credit, one very common source of credit information is references. This is probably the most subjective, biased information we can obtain. Who would list a company that was not paid on time as a reference? Every business pays some vendors according to terms. Allowing a customer to cite his or her references is like getting a character reference from someone's mother. A more objective reference is one the customer did not supply. An excellent source for these is your own sales representative. If your rep has the opportunity to see a customer's shelves or warehouse and identify other suppliers to you, then you will be able to obtain less-biased information.

Credit ratings for a customer with a $100M balance and a 70
percent "best" percentage

Rating         1-30      31-60      61-90         OVER 90
$100M                                               PROMT
              $100M                                SLOW30
                         $100M                     SLOW60
$75M           $25M                            PPT-SLOW30
$75M           $15M       $10M                 PPT-SLOW60
$60M           $25M       $15M                  SLOW30-60
               $60M       $15M       $25M       SLOW60-90

Bank references are also suspect. How many banks have told you a customer was "unsatisfactory?" When your customer borrows from its bank, remember who holds a security interest in most of the assets - including inventory. The bank's positive reference for your customer (its debtor) works in its favor.

Most of us buy credit reports. The agencies that sell them generally do a very good job of collecting and qualifying the information they sell. Even so, these firms are only the proverbial messengers - they can report only what they are told. When different cred it managers interpret and report experiences differently, these differences can be reflected in data that are sent electronically. Good examples of this are the Trade Tape Programs used by many credit reporting companies. Each contributor sets parameters that influence the data transmitted.

As a tape contributor to one of these companies, I am given the option of setting my own "best" and "worst" percentages. The "worst" percentage is the amount that is not reported delinquent. If this were set to 5 percent, then the first 5 percent of a customer's balance from the right would not be rated as delinquent. This is to allow for disputed items or pending deductions. The "best" percentage is the amount that determines the best part of the payment reference. If an account's balance is all current, then the rating would be PPT. If the entire balance is 1-30 days slow, the rating would be SLOW30. …

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