Magazine article Business Credit

Making Credit Decisions without Financial Statements

Magazine article Business Credit

Making Credit Decisions without Financial Statements

Article excerpt

In the ideal credit world, all decisions are based on complete audited financial statements from every customer. my world, and maybe yours, isn't an ideal one. Perhaps your company does not require financial statements, or you can't get them. Whether due to the industry, type of customer or some other factor, suffice it to say that financial statements simply do not happen for all of us.

Credit professionals who get detailed financial statements on their customers may scoff at those of us who don't and say, "How can you make decisions like that?" or "Isn't that just like flying blind?" Hardly! Actually, it's a golden opportunity, not a hindrance. Those who have successfully worked for years without financial statements know exactly what I mean. Without an audited financial statement, our other skills expand, strengthen and sharpen to compensate for that missing information.

Turning a Liability Into an Asset

When financial statements are available, it is tempting to stay behind our desk, basing decisions too heavily on the numbers. Without financial statements, we are forced to explore the forest of information that is available, instead of merely peering at the distant trees. And by doing so, we become better acquainted with our sales force, our customers and the products they buy from us.

Making decisions without financial statements is a professional, but very personal science. It is a hands-on activity that hones communication skills and always provides enough challenge and variety to keep us on our toes.

Instead of just being "the credit manager", you will be more visible in the sales arena because the information required for your decisions will come from sales representatives, customers and many others who are involved in the process. Positive public relations will enhance both the stature of your department and your personal reputation while increasing the overall cooperation between sales and credit.

What are the steps in making a credit decision without a financial statement? Really, they're not much different from the ones you would take to accompany a financial analysis. But without that statement, those steps become even more critical. You must be thorough, perceptive and accurate. There is simply no room for incomplete investigations or sloppy procedures.

First, the Basics

You know the drill. Seek out every possible fact. Partial credit applications, outdated references, overlooked resources or exceptions to procedures must be addressed. With no financial statement as a base, you should look at four sources of information: credit applications, trade references, bank references and reporting services.

Credit Applications

Review all parts of the credit application in detail and be open to making changes to that form. Analyze the language for clarity, legality and accuracy. Does it allow for the recovery of third-party collection fees and court costs? Does it call for the maximum allowable interest under the laws of your state? Does it contain a personal guaranty? Does it require written notice by certified mail to change ownership, style of business or authorized purchaser? Remember, a check received as payment on account from a new corporation is recognized in most states as proper written notice. Finally, is there space for a printed name under the signature?

Trade References

Keep them in perspective! Most customers will only give you the good ones. If you know your industry well, you can judge if a major vendor, a likely supplier to the applicant, is missing from those provided. Contact those missing references so that you can see the bigger picture. A review of your reference checking procedures and protocol will ensure that you get complete, accurate information from the source. Always offer to reciprocate with information of your own when the need arises.

Bank References

Use standard Robert Morris Associates (RMA) forms and guidelines, take advantage of banking contacts you have developed and, most important, get the name of the applicant's lending officer. …

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