Sources of Credit Reports/Direct Sources of Credit Information

Direct Sources of Credit Information
Which type of investigation is the best depends, as you may have already guessed, on the situation. So, if a seller’s international credit managers choose to use a direct investigation as the approach, or even just some aspects elements of a direct investigation, they are going to need to know a little about the sources of credit information they can use and how they may go about collecting it.

The Buyer
To initiate a credit investigation, always begin with the buyer. A tactful way of soliciting this information is for the seller’s business to initiate an exchange of antecedent and financial information between the seller and the buyer. At best, the buyer may volunteer valuable data, including financial reports, a detailed biography of the principals, and a history of the business going back over several generations. At worst, the buyer will provide no information at all, feeling that such a request reflects upon the integrity of the principals.

As a result of differences in accounting methods, international financial statements cannot generally be analyzed in the same way as domestic statements and often are not as easy to obtain as in domestic situations. They are also difficult to evaluate because accounting practices and tax regulations differ widely from country to country. The time required to gather information is greater than in domestic operations, so many international credit managers build a comprehensive file of information on prospective foreign buyers so they may make quick decisions when necessary. Credit information sources range from the buyer to the comprehensive economic and business data compiled by U.S. government agencies, by the international departments of banks, by private trade promotion organizations, and by publishers and organizations that foster foreign commerce.

Direct Correspondence
Direct correspondence is the most common basis for contact with all buyers. Opening accounts presents an excellent opportunity to set a tone that will keep a buyer providing credit information. Today correspondence can be conducted by telephone, facsimile (fax), and e-mail, as well as through the US Postal Service. However, an international credit manager must use discretion and match the medium with the nature of the communication.

Request for Financial Statements
The best place to put a request for financial statements is in the credit application. The application should have a requirement for a customer to provide regularly audited financial statements or to provide them on request. Enclosing a blank financial statement form with the application serves several purposes. It reveals to a buyer that supplying financial information is indeed a common practice; it makes it easier to comply with the request; and it helps ensure that all information desired by the credit department will be submitted. The use of a standardized form also makes analysis of information easier. It is particularly advisable to send a standard checklist of questions rather than an individual request when a follow-up is necessary to amplify items on a statement already submitted.

Telephone Contacts
Telephone contacts can be used to supplement financial information on statements submitted to the company or to a credit agency, to obtain references, to bring financial information up to date, and to verify reported contracts. Often the next best thing besides a personal visit is using the telephone, which has the added advantage of being less costly and time-consuming. Before making telephone contact, it is wise to prepare a form noting the points to be covered and the information needed. Doing such is very helpful, particularly for the inexperienced, or when a large number of points are to be discussed. E-mailing an agenda and time that the telephone call will be placed is a smart approach by an evaluator, especially if international time zones are involved.

As in the case of the personal interview, a memorandum of the telephone conversation should be written promptly and placed in the credit file.

Bank Information
An excellent source of credit information is a seller’s bank. An inquiry directed through this source stands a better chance of obtaining useful information than one directed to a foreign buyer’s bank. Bank information generally includes a history of a foreign buyer, antecedents of the principals, and some financial data. A fairly complete picture of a firm’s credit standing often may be obtained; but, depending on a seller’s risk, bank reports should be supplemented by information from other sources.

Overseas Banks
Overseas banks vary widely in their co-operation with requests for information; and, like information received from a buyer, the credit information secured directly from a foreign bank varies in value. It may include business history, business background of the principals, financial data, or merely comments that this foreign buyer is a respected member of the community.

Bank-to-Bank
It is possible for a seller’s bank to check with a buyer’s bank when an international credit manager’s efforts are unsuccessful or when special information is needed. Normally an international credit manager will employ this technique when a large value order is pending or initial appearances indicate some higher level of payment risk potential than normal for a seller. Often this technique is successful since banks might disclose more information to other banks than they do to sellers or trade creditors who are not their depositors. Sometimes a fee is charged for this service. When considering the circumstances, this fee might be very well worth the investment.

Information Sought in a Bank Inquiry
An international credit manager should explain the scope, nature, and reason for the inquiry. The depth of response rests on several basic factors. First is the amount of money involved. Then the credit manager must be certain that the proper person is contacted at the bank; be well prepared with precise questions before calling or writing; and be careful not to violate the following caveats. Banks will not usually volunteer unsolicited information. They will, however, answer specific legitimate questions that do not violate confidentiality. An inquiry that involves a large value and includes specific data, such as terms of sale and a request for financial details, may well receive a more detailed reply than one that refers to a small value with vague reference to the terms of sale and other factors. Banks will generally decline comment about a company’s ability to pay a specified amount.

Seller’s Foreign Sales Representative
A seller’s sales representative or company agent abroad can also be a valuable source of information. Local, in-country representatives should know much about their customers--not only purchasing patterns, but the company’s reputation, competitive environment, employee satisfaction and the like. An agent is known in the customer’s trade circle and has access to credit information from local banks and commercial sources. A representative can therefore offer a fair picture of a customer’s financial condition, as well as confidential data which would be difficult to obtain from any other source. Of course, if a local sales representative is native to the country, he/she will have a better understanding of business and cultural issues that impact the local customers. An international credit manager must also take into consideration the cultural ties and business relationship between the parties involved.

Trade References
Trade information consists of facts obtained from merchandise suppliers of the customer, including the following:
 * 1. Recent high credit, amount owing, amount past due
 * 2. Whether customer payments are discounted, prompt or slow and, if slow, how many days
 * 3. Whether a supplier has referred the account to a collection agency
 * 4. Other facts about the buying and paying record of the customer

This vital information describes how the customer actually pays bills, regardless of other financial facts.

The payment record should be examined for specifics as well as for the trend of payments, and be reconciled with the condition indicated by a buyer’s financial statements. Though slow trade payments are often a sign of trouble, they may also characterize a business that is having growing pains but is substantially healthy; its slowness may be seasonal or a result of expansion.

Sources of Trade Information
Depending upon a buyer, the industry, location, size of order, and other factors, an international credit manager has several places to get this information. Those most commonly used include credit reporting agencies that report on all industries, industry credit groups, direct interchange with other suppliers, and agency trade checks.

Direct exchange of information with other suppliers is costly and time-consuming but can be very useful when there is substantial credit exposure, when agency and bureau reports are inadequate, or when industry group interchange is not practicable. Personal acquaintance, proper identification, and mutual trust and confidence play a key part in these direct exchanges. International credit managers should also bear in mind the legal limitations to such an exchange, as noted earlier.