Making Smart Credit Decisions with Limited Customer Information

When customers provide thorough information, it makes the job of a credit analyst much easier. However, customers are more reluctant than ever to hand over financial information and often withhold documents that are vital to assess credit worthiness.

Roughly three in every four credit professionals say financial statements are the most difficult piece of information to obtain from customers, have the most trouble obtaining financial statements from customers, according to an?eNews?poll. Bank references, trade references and retail tax certificates are also difficult to get, but not nearly as much as financial statements. Each document serves a special purpose and offers a different snapshot into the financial health of your customer.

“We ask all of our customers to sign a credit application in order to get information regarding financial statements, bank references and trade references—but getting customers to complete the credit application itself is a challenge,” said Kenny Wine, CCE , director of credit at Joseph T. Ryerson, Inc. (Little Rock, AR). “We’ve driven our customer base to an online portal, which makes the customer sign pieces of the document before being able to move to the next screen. Customers won’t be able to set up their account until they agree with the terms and conditions of sale, and bank and trade references are included in that agreement, so we’ve seen success in that.”

Every piece of information fills a hole in a customer’s bigger financial picture. But often times, credit professionals are trying to complete the puzzle with limited pieces. So, if you can’t get financial statements from a customer, it is time to look at other options, said Brett M Hanft, CBA , CBA, credit manager at American International Forest Products LLC (Beaverton, OR). “I get customer information from as many different resources as possible. I rely heavily on NACM industry credit groups and other credit managers when financial information is limited.”

Google searches and social media are also useful when you can’t get information directly from your customer, Hanft added. “For example, if the owner of a business posts a picture of a new sports car but can’t pay their bill, that’s a red flag.”

Credit analysts have tons of other tools to gather information, like trade references, NACM credit groups and NTCR reports. Even driving by your customer’s physical business can provide more information than you might think. “I’ll have a salesperson drive past a business and look at the location to see if there are people working, if the grass is mowed and if the name of the business is on the front of the building,” Wine said.

A customer’s expenses, profitability and debt are all laid out on financial statements, making them key to assess a customer’s financial performance and make strategic credit decisions. However, even if you have success in obtaining these documents, sometimes they are not accurate. “Financial statements are tough because a lot of times when you get the statements, they’re from QuickBooks or Excel,” Wine said. “The customer base I deal with are mainly mom-and-pop shops that do their own financial statements. It is so important to get statements that are audited.”

Some credit professionals have adapted to limited financial statements and learned to make credit decisions without financial statements at all. “Our department doesn’t look at financial statements too often because most customers are small independent restaurants—meaning the product we have rolls over so quickly that the terms are shorter,” said Kevin Freund, CBF , credit manager at Bix Produce (Little Canada, MN). “The most difficult piece of information for me to obtain from customers is retail tax certificates because they either don’t understand the forms or claim they’re not tax exempt.”

Credit professionals who do not use financial statements when obtaining customer information tend to have more difficulties with bank references. Banks in recent years have charged fees for references and can be vague with the information needed from customers. “Sometimes our customer will connect us with their banker and allow us to call the banker for more specifics,” said Wine. “From a big picture standpoint, you typically get the bank reference, but if you want to get any meat to the data, a lot of times you’ll have to call.”