Costs and Value of Credit/Credit Report Assessment Factors

Credit Report Assessment Factors
Before international credit managers decide whether a direct or indirect investigation is appropriate, they need to consider five factors: credibility, cost, value, timeliness, and completeness. Neither the direct or indirect approach is the best when all five factors are considered. A credit manager must to assess whether cost and timeliness is more important than completeness or value. As is the case in most business decisions, it depends on the circumstances.

Credibility
Each report has its own credibility factor, just as the organization has that produces the report. There is no “one, magic” source: a review of the country that the customer is located in could impact the report; the reputation of the firm producing the report often can change, as corporations are bought and sold. Such is true when using either a direct or indirect approach.

Most astute credit people have “favorites” based on their own experience, but there is a danger to this approach, since some firms have a better reputation in some countries than others. Since many of the reporting firms contract with outside organizations to develop the data, there is valid concern as to the accuracy of the information.

Costs
Costs can be measured two ways. For a direct investigation, the costs associated with a seller’s international credit manager and analysts should be considered. For indirect investigations, costs are typically measured by the fees paid for the report.

Credit reports are sold on a per-investigation basis, which can range from $60 to $200, to a contract basis for so many units for so many dollars over a period of time. It is not uncommon for a Fortune 100 US company to have a budget of $200-$400K per year for contract information on customers as well as countries. In addition, a wise international credit manager knows that his/her bank will provide information on select customers, often at no charge and as a result of the company’s banking relationship. Credit insurers and insurance brokers, even if an international credit manager does not have an insurance policy with a carrier, are an excellent and often free sources of credit data.

Fortunately, there is considerable information available on the Internet to help alleviate costs. The amount of general information on the Internet is truly overwhelming: publications, periodicals and news services. Internet access does make it easy for the international credit manager to check out many more publications than one would normally purchase to read. All the major newspapers are available on the Web. Right now, The Wall Street Journal is one of several charging an access fee. Publications such as Fortune and the Economist are online, as is Business Credit (on the NACM site). Also useful are the financial networks, such as CNN Financial News and Bloomberg. Finally, the Internet offers a fast, efficient, and cost-effective way to communicate with customers. E-mail seems to work faster and has an inherent friendliness that is a bonus in credit management situations. Somehow, people find it easier to compose e-mail messages rather than to use regular mail.

Of course, the global credit executive must ensure that e-mail messages adhere to the same standards as regular letters. A relaxation of style does not mean relaxing credit policy or normal business practices.

Much credit information is confidential in nature. A professional credit executive should take every precaution to maintain standard levels of confidentiality, which may mean using encryption or otherwise securing messages and transmissions. Security also means controlling access to the computer where e-mail messages are stored.

Value
The credit report is only one source that a credit manager needs to make an intelligent decision about the level of risk. No seller should rely completely on a credit report. If a direct investigation is being considered in full or in part, there are other sources to be considered.

The Customer
The best starting point for credit information is always with a buyer. Some buyers are more forthcoming with information than other providing credit references, financial information, and details as to the background of the principals, and a history of the business. Many buyers, however, feel that their information (if it is a non-public business) is not to be shared with other businesses. In such situations, an international credit manager needs to be sure to develop a relationship based on trust, so that potential buyers are comfortable releasing critical information.

The Sales Representative
A seller’s sales representative abroad can also be a valuable source of information. In all probability, a sales agent has had the opportunity to study a buyer’s business practices firsthand. A sales agent is known in the buyer’s trade circle and has access to credit information from local banks and commercial sources. A sales agent can therefore offer a fair picture of the buyer’s financial condition, as well as confidential data that would be difficult to obtain from any other source. Often a sales agent will have a personal relationship with a buyer contact, whether it be the owner or decision-maker. An astute international credit manager recognizes that this relationship needs to be emphasized if he/she wants to obtain information and develop a level of confidence with the customer.

Timeliness
Timeliness is a particular issue with international credit investigations. In some cases the overseas credit reporting agency can take two weeks or more to respond. In that situation, a direct approach may be timelier and more appropriate.

If you have ever read a magazine article or book on “what’s going on in a particular county,” you know that it is often already outdated material. In the time it took to get the information printed, circumstances may have changed. On-line web resources, daily and weekly newspapers ( The Asian Wall Street Journal or The Financial Times ) are the often the answer for obtaining truly timely information.

An astute international credit manager utilizes in-country accounting firms, lawyers, and bankers he/she has developed as resources of information. “People on the scene” usually are an excellent source for local news and information.

Completeness
It is rare that any credit report is truly “complete.” Even if payment information, financial data, and antecedent information exists, an international credit manager may be unsure as to country conditions.

Through experience, networking and education, an international credit manager can conclude what a “good” report is – often determined by the level of risk estimated; the value of the order; the need to meet sales goals; and the nature of the transaction, whether, for example, it is  a one-time order or a lasting relationship (Exporting – From Start to Finance,  Wells and Dulat-McGraw Hill).