Is the credit world reinventing itself?

Hands up if you recognise this story.

A buyer for a Danish electronics manufacturer wants to place a very big bulk order of silicon chips with you. She suggests that it's likely to lead to a lot of repeat business but she wants three-month terms for the full value of the order on receipt of the full delivery.

Your company has also been in negotiations with a buyer at a firm in the same sector in Spain, who asks for similar terms for a similar deal.

In an ideal world, you'd of course do business with both manufacturers – and maybe you will in due course – but you need to prioritise the orders and decide on how tough a line to take in your credit negotiations, as you've got your own supply chain to worry about, existing customers' orders to fulfil, and a delicately balanced cash-flow to protect.

You've never sold to either company before, so presumably one of your first steps would be to assess their creditworthiness via external sources. But how?

You have access to data from a number of online credit specialists, including one that caters for the Nordic region and another that focuses on Iberia. At face value, the Danish company seems the far safer bet. Its credit score is significantly stronger and, after a bit more due diligence, you conclude that, in short, it carries less risk.

So you make a decision on how best to approach the two potential orders and who to prioritise.

But did you make the most informed decision? Did you actually have the most complete and consistent risk picture? Were you in reality comparing like for like? Context is everything and times are changing.

Knock-on effects of the credit crunch

In fact there's mounting evidence to suggest that the credit world has gone through a recent and rapid period of reinvention.

The global credit crunch of 2008 didn't just reinforce and enhance the rules in the (now) highly-regulated banking sector. Coupled with changes in technology, it had a knock-on effect on the rules and best practice in all sectors that deal with credit. We've also started to see a shift in the variety of personnel who assess credit and make decisions around it, and the motivation for risk assessment.

According to Sander Desmet, a risk product director in Bureau van Dijk's Brussels office, we've moved from "a purely reactive 'on report' attitude to a proactive 'on portfolio' attitude" and he notes that "credit managers are gradually changing from being account-type people who specialise in financial analysis" to those with a more diverse set of skills.

Some studies, Desmet says, say that "the financial crisis was in part due to the lack of technology to provide a detailed view on where risks are situated. That's why changes today are focusing on technology, big data, business intelligence and portfolio management."

Establishing context

We've produced a white paper that addresses these issues. Through a dozen or so chapters and an appendix, we share our thoughts on the factors behind helping people reach the right decisions in new and interesting ways. Solutions-focused, we have experience of dealing with customers who need reliable company information for credit and general risk, and we deliver metrics that are easy to interpret, evidence-based, transparent and – crucially – standardised across geographies for meaningful comparisons.
 
And that's the focus of the white paper: the huge benefits of a standardised, company information-based picture, the methodology behind delivering one and how adopting such an approach can help your business. We've seen a hugely increased appetite for greater transparency over the years, with clients eager to put the days of "black box" credit scoring behind them.
 
In the scenario outlined at the start of this article, while location and industry would have indirectly contributed to these companies' credit scores, what the people behind the credit scores might not have done was apply weightings for geographical and sector context, which could have given a very different picture of the two companies.
 
Had they done so, their scores would have taken into account key weighted factors such as the variations in corporation tax and localised sector averages that affect or put into a localised context the two companies' profitability ratios, ratios being one of the main determiners of credit score.
 
These are factors that we believe must be taken into account when looking for a complete picture.
 
This white paper explores these factors and sets them in context.
 
Download the full white paper.