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Allen Liebnick
Allen Liebnick

Is Your Customer Credit Worthy?

Why in-house credit departments and the Internet are not good enough.

August 4, 2011
by Allen Liebnick, CPA, CFF

In today’s economic environment, companies’ CFOs are facing daunting tasks in making business decisions. On the operation side, they are trying to cut costs, run a more efficient operation, negotiate the best pricing for raw materials, supplies and capital improvements, operating on a lean mean budget, avoid layoffs, answer to boards and stockholders and, most important, try to maximize profits. On the flip side, it is no longer just a question of to whom the sales are targeted, but what type of payment terms can and should be offered and whether those potential customers have the financial capability and credit worthiness to pay for the product if they hit a bump in the road. With the Internet, there are a lot more resources that enable a company to learn about their potential and current customers’ financial situation.

In a larger operation, a company may have a staff of credit personnel who have access to various paid research companies that will provide more in-depth information than can be garnered over the Internet, while smaller companies may have to rely entirely on outside help to get the information they need to determine the credit worthiness of their customers. And, once a company has this information, how they best use it? To find out, I spoke with Howard Raab, president at Woodland Hills, Calif.-based Park Avenue Transglobal Financial Services, Inc. (PA). He has in more than 20 years’ experience as both a lending officer with Chase Manhattan Bank’s factoring division as well as a corporate credit manager with Merrill Lynch. PA has been providing commercial credit reports and recommendations for 26 years for clients that include Fortune 500 Companies.

Why Companies Should Use Credit Reporting Agencies

While the Internet has a slew of information, Raab noted that for the most part it was for consumer consumption and does not necessarily provide “the information to determine an informed line of credit or offer the confidential information such as payment history, detailed financial reports and banking relations.”

So, if not the Internet, then where can companies go for this information? The answer lies with credit reporting agencies. For one thing, they do they not rely on information that is available publicly, but on trade references. An established credit reporting agency conducts periodic reviews of a potential customer’s financing arrangement to ensure that there is no violation in the company’s lending agreement. Credit reporting agencies have contacts with most major financial centers that provide lending information such as lines of credit, amounts outstanding and if the outstanding amounts are secured or unsecured and, if secured, the nature of collateral. In addition, “they make further inquiries about the availability under the credit line and when the credit line comes up for renewal.”

Even when a company has its own in-house credit department, they should still use credit reporting agencies. This is because agencies hold a long-standing place in the financial community and have close contacts and ties with major companies and their lenders that provide greater insight into a company to which a client is considering selling. Established credit reporting agencies have access to a customer’s cash-flow and current financial condition and credit worthiness. “It is not unusual for a Fortune 500 company with a large in-house credit department to utilize the services of a credit reporting company,” said Raab.

Do Credit Report Agencies Provide Recommendations?

Many credit report agencies provide detailed credit reports and highlight latest information. Raab’s company also provides, “the latest financial information available, along with conversations with management and their projections for the upcoming period. A credit recommendation is then submitted outlining the most current financial review along with the financing availability provided by the lender,” he said. While Raab’s company does provide recommendations, it is ultimately “up to the client to determine what amount of risk they are comfortable with.” He pointed out that many companies are taking on greater risk in today’s economic environment and providing sales to customers that they would not have necessarily considered in the past. “But with the information we submit, they can make a more calculated assessment and negotiate more stringent payment terms,” he added.

And if a credit agency provides an unfavorable credit report, then what? As noted earlier, it is up to the client whether they use a credit agency’s recommendation or override it in favor of negotiating more stringent payment terms. “We would try to obtain comfort levels, such as, personal guarantees, corporate or cross-corporate guarantees, if applicable, and arrange for bank letters of credits whether it be irrevocable or a on a standby basis,” said Raab as other options that companies can utilize to ensure payment.

Conclusion

To ensure you have a credit-worthy customer, it’s best to put the Internet aside for once and fall back on tried and tested credit rating agencies that are long established and have a firm footing in the financial community and can provide you with detailed reports as well as recommendations, should you choose to use them. And don’t forget your long-term existing customers either. Raab highly recommended that credit reviews be “performed at least quarterly to ensure that there are no downward trends in a customer’s financial condition,” in light of today’s economic uncertainties.

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Allen M. Liebnick, CPA, CFF, is president of Overpaid Payables Recovery, Inc.. He has been providing accounts payable, sales tax and telecommunications post-audit recovery services for over 18 years. Liebnick is a member of the New York State Society of CPAs as well as Texas Society of Certified Public Accountants and chair of the 2011 Texas State Society of CPAs State Tax Conference. Liebnick thanks Howard Raab for his contribution to this article. Tell him Allen sent you.