MSU Global/International Business and the Certified Global Business Professional/Domain 4/Task 3/Statement 1/Influences on a credit report
- 1 Influences on a Credit Report
- 1.1 Direct Sources of Credit Information
- 1.1.1 The Buyer
- 1.1.2 Direct Correspondence
- 1.1.3 Request for Financial Statements
- 1.1.4 Telephone Contacts
- 1.1.5 Bank Information
- 1.1.6 Overseas Banks
- 1.1.7 Bank-to-Bank
- 1.1.8 Information Sought in a Bank Inquiry
- 1.1.9 Seller’s Foreign Sales Representative
- 1.1.10 Trade References
- 1.1.11 Sources of Trade Information
- 1.1.12 Other Sources of Direct Investigation
- 1.1.13 Newspapers
- 1.1.14 Directories, Internet and Other Reference Materials
- 1.2 Indirect Sources of Credit Information
- 1.1 Direct Sources of Credit Information
Influences on a Credit Report
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 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 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.
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.
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 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.
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 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.
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.2
Indirect Sources of Credit Information
Every experienced credit manager can recount instances when “going direct” in an investigation or a personal visit turned up pertinent information about a credit applicant that was otherwise unavailable. However, as we mentioned above, the truth is that many international credit managers today have neither the staff nor the time needed to conduct thorough direct credit investigations, especially when dealing with overseas markets. Instead, they turn to a third party. In order to appreciate the list of indirect sources of credit information provided below, we need to explain how the data which is provided from these credit agencies (through credit reports purchased by the seller or exporter) is created. For starters, all information today is automated and is usually obtained via CD-ROM or downloaded directly from a mainframe computer. Automation and technology have made credit reports more attractive to credit executives for several reasons. Combined with vast databases, computers can provide information about companies nationwide. Large companies today deal with tens of thousands of customers that are more and more often not geographically local to them. The level of effort required for direct investigations on large numbers of customers is beyond the means of most companies and would take far too much time. Reports can be generated instantly and sent electronically or faxed for same day responses. Decisions about credit applications are time sensitive. There is usually urgency for a fast decision in order to make a sale. The ability to obtain a credit report on a same day or one-day basis can affect a company’s revenues. The cost benefit of using credit reports, or reports purchased externally by the seller or exporter, is high. The salary of a credit investigator can pay for more credit reports in one year than the investigator could produce in one year. There are also additional savings in telephone, postage, supplies, storage, and overhead costs. Credit reports can provide additional marketing data for the company. Examples are checking a customer’s trade lines for growth and, therefore, the possibility of additional sales or reviewing trade terms for customers according to their credit risk. Some credit reporting companies also provide relational information reports. A number of agencies provide business information reports on companies located inside as well as outside the United States. Some of these also provide domestic credit reports, while others focus primarily on non-U.S. companies. FCIB, Dun & Bradstreet, Experian, SJ Rundt, OECD, Graydon America are some of the groups that report on non-U.S. companies. In general, reports on foreign companies are similar in content and format to domestic reports. They may be purchased individually or contracted for in advance. International Company Profile The International Company Profile (ICP) is a service provided by the U.S. Department of Commerce Commercial Service. ICP’s are available on companies located in over 80 countries. The exporter is charged a small fee for each ICP and the information is provided within 10 days or less. The ICP includes: A detailed credit report on prospective sales representatives A listing of the company’s key offices and senior management. Banking and other financial information about the company Market information, including sales and profit figures as well as potential liabilities. An opinion by the overseas U.S. Commercial Staff as to the viability and reliability of the overseas company or individual as well as an opinion on the relative strength of the company’s industry sector in the target market. FCIB FCIB-NACM, an association of executives in Finance, Credit and International Business, is a wholly owned subsidiary of NACM which serves professionals involved in worldwide export financing, credit, treasury and international subsidiary management. The purpose of the association is to raise the level of expertise and professionalism of members and to provide enhanced job enrichment through relevant discussion and exchanges of experiences. Among the services FCIB provides are: Conferences. FCIB holds regional US meetings, three international conferences and an annual Global Conference, all of which focus on current worldwide credit, collection and exchange problems as well as in-depth country discussions. Industry Export Credit Groups. FCIB operates eight export credit groups in the US and Europe. The groups meet to discuss past experiences of individual mutual accounts as well as general country problems specific to the industry. International Bulletins and Newsletters. Current changes affecting credit, collection and exchange conditions throughout the world are reported in the FCIB international bulletin which is distributed to all members. The bulletin presents a “reader’s digest” for members and is an invaluable aid to keep them abreast of ever-changing conditions in world markets normally not discussed at meetings. Country Reports. These reports summarize current experience of international finance and credit managers, capturing timely, in-depth information on the credit risks of export sales in 16 countries. FCIB’s country reports assist international credit professionals to forecast foreign exchange availability, transfer risks and prospective currency changes. International Credit Reports. FCIB, because of its large volume, is about to offer its members access to the major international credit reporting agencies at attractive prices. Dun & Bradstreet The largest general reporting agency is Dun & Bradstreet (D&B). It has information on more than 92 million firms world-wide, although not all of it is complete. While firms have to voluntarily give trade data, D&B is the one of the few agencies that uses reporters to gather information about companies. Business Information Report This is the basic credit report, which is developed by D&B reporters. (Information is obtained from direct interview with the business owner, partner, or corporate officer. It is then confirmed and expanded through investigations with the business accountant, banks, and supply sources (for payment experiences); by checking public records at federal, state, and county levels; and from a review of D&B’s own internal files. After all the information is analyzed to determine the strength and desirability of the account as a credit risk, a D&B rating is assigned, and the data are compiled into the written Business Information Report. While reports are normally scheduled for updating every six months, revisions are made whenever circumstances warrant. Other information, when uncovered, is issued in a report form called the Special Notice. These flyers contain data on such items as fires, floods, deaths, tax liens, suits, judgments, new products, and branch openings. When the information is of such nature as to affect the credit rating, either upward or downward, the entire report is revised and a new rating is assigned. D&B Rating Each full rating involves two factors: first, a double-letter or number-and-letter combination identifying financial strength; second, a single-digit number on a scale of one to four, indicating the composite credit appraisal as high, good, fair, or limited. Ratings are a convenient method of measuring accounts in addition to serving as a broad basis for credit insurance classifications. D&B Reference Book Key information extracted from the Business Information Report forms the basis for listing in the D&B Reference Book. A “P” at the end of the listing indicates that a Payment Analysis Report is available on the particular business. Some listings are prefixed by the letters “A” or “C.” The “A” identifies a business listed for the first time. A “C” prefix signals a change in rating since the prior edition. The Reference Book contains nearly three million listings of commercial enterprises in the United States, Puerto Rico, and the Virgin Islands, arranged alphabetically by cities within states. The Reference Book is updated and republished every 60 days. Payment Analysis Report This features the PAYDEX (a numerical scoring system) score shows an instant overview of the firm’s payment habits. Seasonal variations, payment performance trend, and the historical payment pattern are graphically illustrated. Experian Experian is the credit reporting business that was formerly TRW. It differs from the other reporting services by including very small businesses and sole proprietorships in its data base as well as larger companies. Experian has an easy-to-follow menu on its website that allows a credit manager to obtain either of the two reports below via the Internet using a credit card to pay the fee. Experian Intelliscore Experian uses statistical methodology to give each business in its data base a composite credit risk ranking between 1 and 100 (best). It is designed for credit managers processing large volumes of credit applications or transactions. Companies using this service can establish multiple scoring ranges with assigned actions, so accounts that need further investigating are clearly indicated. Relationals Information Experian also offers companies relational credit information that they can use with electronic filters to enhance their credit decisions, set benchmarks, and fine tune sales tactics. Business Profile Companies can obtain a business profile of a customer that includes financial information from Standard & Poor’s, the average number of days late (DBT) a company pays its bills past the invoice due date and a predicted DBT 60 days in the future, payment trends for the company and its industry, and UCC filing data. SJ Rundt & Associates A reporting agency, this firm provides two reports: the World Business Intelligence -a weekly briefing dealing with 14 to 16 countries each, assessing the latest economic and political developments, focusing on those that are important, explaining what they portend for the future in international trade, investment and finance, interest rate and exchange rate tables and forecasts. The second report is the Financial Executive Country Risk Alert issued three times per year which is a combination of forecasts and survey results assessing export credit and short-term financial risk for over 100 countries. Risk ratings on a scale from 1 (best) to 10 (worst). Between full updates, countries are subject to weekly reviews and are updated individually (and re-rated, if necessary). Organization for Economic Cooperation and Development (OECD) The OECD is a Paris-based intergovernmental organization, established under a 1960 convention, whose purpose is to provide its 29 member countries with a forum in which governments can compare their experiences, discuss problems they share and seek solutions which can be applied within their own national contexts. The fundamental task of the OECD is to enable its members to consult and cooperate with each other in order to achieve the highest sustainable economic growth in their countries and to improve the economic and social well-being of their populations. The original members of the OECD were the countries of Europe and North America, followed by Japan, Australia, New Zealand and Finland. Just recently, Mexico, the Czech Republic, Hungary, Poland and Korea have joined. The OECD publishes various booklets which assess economic trends and prospects. Many statistics are available through its on-line bookstore. Other Private Credit Companies Graydon America, Hoovers and Coface North America are providers of online and offline business credit reports from around the world via the Internet. They have nearly 100 countries online, including Europe and the US. With more than 200 countries offline, sample reports can be accessed through the website.