Credit Reports/Sources of Credit Reports/Direct Sources of Credit Information

Direct Sources of Credit Information
We have yet to suggest which type of investigation is the best because, as you may have already guessed, it just depends on the situation. So, if the sellers’ international credit managers choose to use a direct investigation as their approach or at least plans on including some aspects 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
The buyer is always the place to initiate a credit investigation. 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.

Due to 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. Furthermore, they are 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 the buyer providing credit information. Today, correspondence can be conducted by telephone, facsimile (fax), and by e-mail, as well as through the U.S. Postal Service. However, the 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 the 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 the 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 check-list of questions rather than an individual request when a follow up is necessary to amplify items on a statement already submitted.

Telephone Contacts
The telephone 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 to a personal visit, the telephone 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. This will be 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 the 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 the seller’s bank. An inquiry directed through this source stands a better chance of obtaining useful information than one directed to the foreign buyer’s bank. Bank information generally includes a history of the 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 the seller’s risk, bank reports should be supplemented by information from other sources.

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

Bank-to-Bank
It is possible for the seller’s bank to check with the buyer’s bank when the international credit manager’s efforts are unsuccessful or when special information is needed. Normally the 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 the seller. Often this is a successful technique, as banks might disclose more information to other banks than they do to sellers or trade creditors that are not their depositors. Sometimes a fee charged for this service. When considering the circumstances this fee might be very well worth the investment.

Information Sought in a Bank Inquiry
The international credit manager should explain the scope, nature, and reason for the inquiry. The depth of response rests on several basic factors: the amount of money involved; being certain that the proper person is contacted at the bank; being well prepared with precise questions before calling or writing; and being 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
The 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 satisfactions and the like. The agent is known in the customer’s trade circle and has access to credit information from local banks and commercial sources. The 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 the 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. The 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. It includes recent high credit, amount owing, amount past due; whether customer payments are discounted, prompt or slow and, if slow, how many days; whether a supplier has referred the account to a collection agency; and other facts about the buying and paying record of the customer. This is vital information. It 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 the 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 due to expansion.

Sources of Trade Information
Depending upon the buyer, the industry, location, size of order, and other factors, the 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. Also, international credit managers should bear in mind the legal limitations to such an exchange, as noted earlier.

Other Sources of Direct Investigation
Sources of information are plentiful and limited only by a credit manager’s creativity. The following sources are by no means exhaustive of the information available for credit investigations.

Newspapers
The Wall Street Journal, Financial Times and local newspapers are important, essential reading for a credit manager. First, it is important to understand the current economic climate. Second, there is a lot of company specific news that can affect credit decisions, or at least suggest further investigation.

Directories, Internet and Other Reference Materials
There are a host of printed materials useful in a credit investigation. First of all, there are the standard sources: Thomas Register, Wards Business Directory, Directory of Corporate Affiliations, MacMillan Directory of Leading Private Companies, Moody’s Industry Review, Million Dollar Directory, Experían Trade Payment Guide, Value Line Investment Survey, and several different publications from Standard and Poor’s and Dun & Bradstreet. Specific industry references can be helpful, as can directories of state businesses and chambers of commerce.

The amount of general information on the Internet is truly overwhelming: publications, periodicals and news services. Internet access does make it easy for the credit executive 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 effective way to communicate with buyers. E-mail seems to work faster and has an inherent friendliness that is a bonus in international 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. The professional credit manager should take every precaution to maintain standard levels of confidentiality. This may mean using encryption or otherwise securing messages and transmissions. Security also means controlling access to the computer where e-mail messages are stored.1