We are in the process of evaluating the creditworthiness of a customer who is refusing to submit financials. An independent credit report has returned stating that no information is available. Our sales department is pressing for approval, while management is resistive, given the circumstances. As a credit professional, what can I do to develop a more complete risk profile for this customer?

It appears that you have come upon a situation that all too often confronts companies doing business in the international marketplace - difficulty in obtaining what you need in order to make an informed credit decision. When the pressure is on to approve credit in order to take advantage of a significant sales opportunity, it is tempting to by-pass usual credit policy procedure and assume an increased risk based on less than adequate information.

Selling on credit is always a risk, but you can minimize that risk by carefully considering all the available data and treating each account as a potential collection problem.

You didn't mention whether or not you were able to obtain a credit application from the prospective customer. If you have not received this document, do so. It is an important source of information when considering extending credit facilities. If your customer is unwilling to fill out such an application, they may well be hiding something. You must consider whether or not you can take that chance.

Verify, personally or through a third party, the information provided in the credit application. Check all the trade and bank references.

You have stated that your attempt to secure information through an independent credit report proved disappointing. Although the report indicated that no information was available, it may, in fact, be providing something very important to consider. If the agency did its job well, that report may be crucial to making your credit decision.

In our company's experience, approximately 10% of the reports on U.S. buyers sought by overseas suppliers come up blank. That means, the company does not exist at the given address, phone and fax numbers. But, what else does it mean? The company is not registered with the state in which it supposedly exists. There is no listing with the phone company in that city or the local chamber of commerce. Other businesses in the neighborhood have never heard of it. In other words, if the company exists at all, it is very possibly a small, unregistered operation working out of the owner's residence. In either case, you have discovered that this company may represent a poor credit risk.

Given the absence of substantive information from the credit report, together with the customer's refusal to provide financials, if interest in this account still exists, it would be advisable for you to suggest that Sales/Credit schedule a joint site visit with the prospective customer.

At this meeting, you will be able to meet face-to-face with the customer and frame your questions regarding ability to pay in a manner that may seem less threatening than requesting financials. This will also give the customer the opportunity to explain the reason he will not furnish financials. You can also take the opportunity to ask for current trade references, bank references, etc.

Such a visit will allow you to size-up the customer's business. This more personal setting sometimes puts the customer more at ease and may result in his offering something short of full financials, such as a balance sheet. Combined with additional trade and bank references, upon checking further, this may supply you with sufficient information on which to base a decision. You may be able to offer a compromise - perhaps half open account and half cash in advance.

A word of caution. While an on-site visit is a good tactic in the situation you describe, you should be advised that even such visits are not conclusive proof of creditworthiness in themselves. The following is a case in point.

Sometime ago, an Asian exporter came to our company seeking assistance to collect a very large debt (US $1 million). Before extending credit, the exporter had come to the States to meet the buyer. He was shown an impressive office and driven around town in a Mercedes car. Based on the visit, credit was extended. But, when the account came due, the money did not.

As it turned out, the buyer had rented that large office (including all the furniture) and the Mercedes car for only a week, expressly to impress the exporter and get the goods. He never had any intention of paying and, by the time the bill was due, had disappeared without a trace. If the exporter had gotten a credit report after his visit, he would have discovered that neither was the company registered, nor did it occupy the offices he had seen. And, he most probably would not have lost his $1 million.

As you can see, there are several sources of information that can and should be looked into, before you arrive at a credit decision. It is good practice not to base your entire decision on one source alone. A credit application, credit report, trade and bank references, financials, and a visit to the customer all provide important input when developing the risk profile of a prospective customer.

Most importantly, once you extend credit and establish a credit limit, don't treat it as if it were written in stone. You should consistently monitor the customer and adjust the limit as necessary, based on changing conditions and your ongoing experience.

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Information provided by ABC-Amega Inc. Since 1929, providing first party accounts receivable collections outsourcing and third party debt collection for management of your commercial receivables portfolio.