CREDIT APPLICANT-SOURCES OF INFORMATION
A number of services supply credit information on businesses, but for some accounts, especially small ones, the cost of collecting this information may outweigh the potential profitability of the account. The firm extending credit may have to be satisfied with a limited amount of information on which to base a decision. In addition to cost, the firm must consider the time it takes to investigate a credit applicant. A shipment to a prospective customer cannot be delayed unnecessarily pending an elaborate credit investigation. Thus, the amount of information collected needs to be considered in relation to the time and expenses required. Depending on these considerations, the credit analyst may use one or more of the following sources of information.
At the time of the prospective sale, the seller may request financial statements, one of the most desirable sources of information for credit analysis. Frequently, there is a correlation between a companyâ€™s refusal to provide statements and a weak financial position. Audited statements are preferable. When possible, it is helpful to obtain interim statements in addition to year-end ones, particularly for companies having seasonal patterns of sales.
Credit Ratings and Reports
In addition to financial statements, credit ratings are available from various credit reporting agencies.
A leading credit reporting agency credit reports containing a brief history of a company and its principal officers; the nature of the business; certain financial information; and a trade check of suppliers, including the length of their experience with the company and whether payments are discount, prompt, or past due. The quality of the leading credit reporting agency report varies with the information available externally and the willingness of the company being checked to cooperate with a leading credit reporting agencyâ€™s reporter. The report itself can be accessed via a computer terminal if so desired.
Another source of credit information for the credit analyst checking on a particular firm is the firmâ€™s bank. Most banks have credit departments that will provide information on their commercial customers as a service to those customers seeking to acquire trade credit (credit granted from one business to another). By calling or writing a bank in which the credit applicant has an account, the analyst can obtain information, such as average cash balance carried, loan accommodations, experience, and sometimes more extensive financial information. What is provided is determined by the extent of the permission given by the bankâ€™s customer. In exchanging credit information, most banks follow guidelines adopted by Robert Morris Associates (RMA), the national association of bank loan and credit officers. Both the RMA Code of Ethics and the Statement of Principles describe how to respond to requests for commercial credit information, whether they are received in writing, by telephone, or by fax.
Credit information is frequently exchanged among companies selling to the same customer. Through various credit organizations, credit people in a particular area become a closely knit group. A company can ask other suppliers about their experiences with an account.
The Companyâ€™s Own Experience
A study of the promptness of past payments, including any seasonal patterns, is very useful. Frequently, the credit department will make written assessments of the quality of the management of a company to whom credit may be extended. These assessments are very important, for they pertain to the original â€œthree Csâ€? of credit analysis: character (creditorâ€™s willingness to honor obligations), capacity (creditorâ€™s ability to generate cash to meet obligations) and capital (creditorâ€™s net worth and the relationship of net worth to debt). The person who made the sale to a prospective customer can frequently offer useful impressions of management and operations. Caution is necessary in interpreting this information because a salesperson has a natural bias toward granting credit and making the sale.