Supplier Credit and Credit Networks Step Up to the Plate: The Role of Business Credit during Deteriorating Business Conditions. (Business Credit Selected Topic)
Hastings, Richard D., Business Credit
Credit quality at many large corporate borrowers is eroding, according to recently published research from Moody's Investors Service, Fitch, Inc. and S&P, making it necessary for banks to prepare themselves against possible future defaults. Declines in corporate credit quality could also have a negative impact on the flow of capital from lenders to borrowers, putting pressure on suppliers of goods and services to figure out how to increase revenues to quality customers while preventing losses from their own distressed customers. This article addresses the ability of suppliers to step in and provide credit when banks reduce exposures during times of economic difficulty. Suppliers' willingness to provide critical trade credit is greatly influenced by innovations in web-enabled credit data networks.
There is the real possibility today of sustained weakness in overall business activity with the resulting risks that some firms will not have sufficient cash flow to service their debts. The attacks and security dilemmas worsen the situation. Credit rating firms--whether supplier credit analysts or credit rating agencies--are now busy assessing the changing conditions.
Credit and the SME Marketplace
During the 1990s, many corporate borrowers, including small- and medium-sized enterprises (SME), depended upon traditional bank credit for working capital, often to make purchases of inventory. Financial lenders may respond to rising credit risks by cutting back on exposure--potentially restricting capital to firms seeking the funds necessary to purchase inventory. It is possible, under the conditions of today's economy, that bank credit may not be effectively passed through to the SME marketplace, leaving it necessary for alternative forms of credit to step in where banks leave off. When economic conditions weaken, inventories tend to accumulate, and suppliers begin looking for new, better customers in order to reduce inventories and build revenues. The role of credit, in this scenario, is critically important.
When bank credit and credit insurance are not easily available, customer analysis takes on a critical role. Wayne Schobel, FCIB Chairman, and Credit & Collections Manager at PACTIV, an international packaging firm, says, "From an international perspective, especially in Europe, commercial credit typically relies upon credit insurance. If credit insurance is denied in too many cases, however, credit managers here and abroad are going to have to look at customers in a way they never did before."
In light of this changing situation, credit grantors will need to perform rigorous credit analyses and gather the most current payment histories on customers. Obtaining the most reliable and transparent credit information is, therefore, immediately necessary.
Suppliers Have the Information Advantage
A contraction in bank lending inevitably magnifies the importance of supplier credit. Credit professionals will play an important role in finding new customers and growing revenues. Larger corporate suppliers, some already borrowing heavily and looking for cash, will likely respond in the following ways:
* Find new customers, many of which will be SME firms
* Improve trend analysis and payment data
* Pressure new customers for more information
* Analyze industry conditions of customers
Buyers and sellers are interested in the same product, leading to mutual interest and collaboration. A retail store has just as much interest in displaying a national brand of apparel as the apparel marketer/manufacturer has in selling to the retailer. Depending upon the significance of the supplier to his customer, he may be able to obtain better and more timely information. This gives the supplier's credit analyst the ability to gather additional quantitative data from the customer--sometimes giving insight into the customer beyond what financial statements provide. …