Updated: Jan 1, 2020
Promoting Credit within Your the Organization Corporate credit is integral to the success of your business. Regardless of where your company is in the business life-cycle, or if it is in transition, the Credit Team is an essential function.
Is your Credit Team fully equipped and is it a change driver?
Fully Equipped Credit Team
My experiences, engaging other credit professionals or assuming the leadership of teams, is that the capabilities and defined duties vary widely. Credit teams range from being fully equipped to being solely dependent on credit reporting or trade references, or land somewhere in the middle.
Fully equipped credit teams have a wide range of tools and resources, and are not satisfied, with a cookie cutter approach, current resources (dynamic) or third-party offerings, in determining credit worthiness. Members of equipped teams are more likely to enjoy the discovery process, think critically, seek further information from customers/internal clients, other creditors, and dig to understand their customers.
What are the components of a fully functional team?
Leadership and Training
Leaders and well mentored team members, self-assess, critically review available tools against decision-making needs, look for new tools or scoring models, communicate with internal clients, and inject themselves into initiatives of the business. Leaders mentor their teams so that they take on new and existing tasks with context and focus. Equipping teams will reveal stars and promotion targets. You see who will simply use some of the tools, and those that critically analyze customers, work in resources and ask questions. Credit should be abreast of all business initiatives, as the impact to credit is often overlooked, and credit insights are often needed in the final decision process. Is the business taking into consideration new standard terms and discounts, revenue recognition, new liabilities, licensing, or the health of different customers and suppliers?
Credit communicates perceived risk, but also how that risk measures against the Company’s stated tolerance. Credit never withhold concerns about a credit exposure. The more minds on a specific situation, the better the solution.
As a case in point, I presided over an exposure in the tens of millions of dollars, with a multi-jurisdictional foreign entity. Concerns over a ‘material adverse change’ and downgrading required action by all levels of the business. Quick communications lead to decisions and actions causing the temporary loss of business and idling of production. The end result was the resumption of business with the customer, a strong bank instrument that was preference proof, shorter terms, and a Chapter 11/15 strategy. We were 80% protected until the customer was acquired.
Credit is responsible to remind management of issues that can arise in the daily pursuit of business, including revenue recognition concerns, country risk, sanctions, financial strength of partners, IRS filings, liens, legal considerations, and terms considerations. Credit needs to be vocal and request entrance into conversations that might lead to risk, down the road.
Credit Tools and Resources
Companies will often purchase a tool and feel the escalating price is a reflection of their growing commitment to mitigate risk. In concert with all available resources, you can have confidence and effectiveness in credit decision-making. Adding your own tools and ranking resources are essential.
· Credit reporting agencies are dependent on creditor and debtor provided information. Payment trends are based on the ‘tapes’ of a fraction of actual creditors. UCC filings are valuable but are they updated frequently enough? Are business affiliations accurate? Financials are published on private companies that are willing to provide them. More and more there are news feeds.
· Rating agencies can be national or international in scope and report on public or public debt-carrying companies. They support the investor community and are generally conservative in their analysis. Analysts are assigned to monitor and periodically report on each subject business. The agencies produce ad hoc reports and make rating change announcements. The rating changes can be positive or negative, and are the result of material changes. Some credit reporting agencies will provide these reports as a hook to get your business. Can rating agencies be influenced? Do you know how to find reputable agencies internationally? When I do detailed credit opinions, I will often quote analyst reports, giving appropriate credit.
· Financials are essential for any major decision or if the prospect could grow rapidly into a major Customer. You must embrace the idea that responsible credit teams will request financials, and it is best to lay the ground work with new Customer. For existing Customers, you have that conversation, get their commitment, and ask that this be an annual event. It’s a good way for Credit to get to know the Customer and for the Customer to feel comfortable to reach out to Credit. Here is the fallacy that I continually bust: ‘We cannot get financials from private companies and it will hurt the relationship if we ask’. Have you considered that if the Customer is financially sound, it is, in part, because they protect their Accounts Receivable by getting financials? Recently, my team obtained 97% of the financials sought on targeted and mature accounts. Generally you can get financial information over 80% of the time, though the form of information may vary. I cannot not recall ever losing a Customer because I respectfully requested financials. I remember an instance of being hammered for daring to ask, but I was re-conciliatory, listened to the complaint, explained the benefit, built a relationship, and then got the information I initially requested. Not all financials are created equally, so see my article on quality and options to full financials.
· Resources for financials may include credit reporting companies. Always check your resources for financials before asking the Customer. I learned this lesson, after being flatly denied financials, and only to find them published on a credit reporting site. For public companies you can obtain financials on their website or go to, www.sec.gov for financials and reporting on US-based and foreign companies doing business in the US. These are required reporting. www.sedar.com is the Canada equivalent. Did you know all UK businesses, including those in the islands have to report their financials, and these are available at no charge to a nominal fee? Various world stock exchanges archive financials and analysis. Some states (US) also require financials if businesses are doing project work with state sponsorship or funding. Those financials may be found on the appropriate commission websites. Rating agencies often sell private companies’ financials for a low rate.
· Talking to a Customer’s financial leadership and setting a periodic call is a strong tool to understand the Customer and its condition. You build a relationship, learn about the business model, glean information on loan commitments, and set a foundation for further calls or visits.
· Research is required for background and economic conditions. It may require reading the financial notes, reviewing rating agencies’ reports, pulling news articles, or reading industry or technical journals. This is an interesting aspect of the job: a) learning about the movers and shakers, b) finding criminal or fraudulent backgrounds/back stories, c) identifying initial product offerings with costs that are market entrant prohibitive, and d) seeing political influence on businesses and industries that are not yet mature enough to stand on their own merits. A case in point: I noted that a major manufacturer had pulled funds to cash on a new facility and 4 months before the 2005 bankruptcy reform was to be enforce. Further reading suggested this was a common move for a company preparing to file Chapter 11. The customer had great challenges and 18 months would not be sufficient time to reorganize. Through terms changes, and protective actions we continued to sell and suffered no losses. The customer reorganized but we suffered no losses or preference claims.
· Assessments and scoring are the means to communicate findings to management and decision-makers. The business will refer to the assessment/recommendation as the baseline for determining if risk falls within their tolerance, or if a business decision needs to be made to assume or not assume the additional risk.
· Have a reporting and scoring tool that incorporates financials/ratios, trends and commentary. This can be produced in house or through a third-party application.
· Risk mitigating instruments is often the means to protect receivables when the credit team or the business determines the need. Instruments can include letters of credit in their various forms, other bank instruments, guarantees, restrictive terms that are inside the 20 day reclamation period for administrative claims, or prepayments.
· Understanding bankruptcy law is a necessary part of the risk mitigation process and plays how Customers are approached.
Credit as a Change Driver
We know management looks to Credit for answers in times of instability (transitional, economic, or cyclical), uncertainty (industrial, governmental, geopolitical or climatic), and during ‘adverse material change’ (restructuring, industry consolidations).
However, your promotion of an efficient and effective credit department mitigates other risks, audit problems and costs. So how can Credit further impact the business?
· New product offering strategies can lead to new standard terms, different industries with different risks, or other legal and competitive liabilities.
· Terms of sale can be changed for a competitive advantage, either ‘across the board’ or on specific accounts. Credit should be involved to, assess the added risk of extended terms, caution to use of this option, assess if a specific customer is ‘in fact’ getting extended terms from competitors, or to determine if other tools should be employed.
· Unique selling strategies can create unforeseen risk or create audit concerns.
· International sales presents unique prospects and challenges. Are there trade restrictions on the prospective companies or countries? What is the country risk and how can they be mitigated? Do you consider open trade terms and what recourses are afforded? Are credit cards an option? What are the appropriate INCOTERMS? If letters of credit are needed, what are your requirements?
· Sourcing financial analysis and recommendations help secure an even flow of inputs.