Over the last several years there has been a significant amount of industry buzz touting the benefits of automating various aspects of the credit decision process including scoring, automated decision logic, workflow and a variety of other technologies made possible by advancements and the availability of specialized software. Clearly, your credit department can realize many benefits—including increased efficiencies, lower DSO and bad debt, and reduced portfolio risk—by automating the credit decision process. But the old adage “garbage in, garbage out” still holds true, and if your company is not leveraging the right data when making credit decisions, you are missing opportunities to create even more value for your organization. Every credit decision requires a specific type of information and, generally speaking, the more specialized the data source, the more predictive it will be. For example, how a particular customer is paying the electric company is not as relevant to your credit analysis as how that customer is paying your peers. This article outlines some of the categories of data that are available to you, how to choose the right source, and what benefits you can expect to realize from using the most appropriate data.
Where to Start
Credit professionals utilize a variety of information to render judgment on a given company, including credit reports, public information, financial statements, trade and bank references, corporate debt ratings, and analytical models. Together, these sources of information ultimately enable a business credit decision to be rendered. A business credit decision may result in a credit score, order release or hold, credit line or other type of action.
A majority of credit professionals rely on some kind of external credit reporting service—typically a major credit bureau. In a traditional business credit operation, many credit analysts rely on commercial credit reports (also known as commercial credit bureaus or commercial credit reporting services/agencies) as a source for payment experience and other business information on new or existing customers requesting credit. This external data source is most important when a company’s customer base is comprised of small businesses or many new customers, as internal payment experiences are likely not available. To this end credit professionals can turn to five primary sources for an external perspective on a given customer:
1. General Credit Reports: Major commercial credit bureaus – This category includes traditional credit bureaus such as D&B, Experian, and Equifax that provide strong coverage across a broad spectrum of businesses. These reports cover a wide array of information including basic address, payment experience, scores and ratings, public record information
(suits, liens, judgments, UCCs, bankruptcy), financials (although somewhat limited), business linkages and other information. The major providers also deliver specialized reports such as small business reports or business fraud reports that can be used to supplement their other reports. All of this information can be delivered in a variety of formats such as e-mail or via the web, but also via XMLS through a third-party software package for use in a more automated manner.
2. Industry-Specific Credit Reports: Specialized data used to supplement the major providers – While the major commercial credit bureaus provide strong coverage through generic credit reports, the market is more diverse for industry- specific and other specialized credit reports. Examples of industry-specific credit reports include eCredit (transportation, industrial supply, manufacturing, office supply, equipment leasing and other industries), Tarnell Company (plastics industry), SeaFax (food industry), Lyon Mercantile Group (home furnishings and giftware industry) and others. These reports typically include basic address, payment experience information, scores or ratings pertinent to the industry, and public record information. Typically, these reports also include industry-specific information that varies by industry (e.g., Department of Transportation data in the case of Transportation reports).
3. Credit Group Reports – The credit reporting industry is also split regionally and served primarily through a network of National Association of Credit Management affiliates. NACM affiliates market their own branded credit reports back to their regional or local member-base of credit professionals. They also manage credit groups to facilitate the communication between analysts in like industries. These reports are typically based on payment experience information from members within the local NACM region and may or may not include public record information. As a member of a credit group, credit professionals exchange historical and other information on common customers through a variety of mediums including fax, mail, and industry group meetings. The most popular method of interchange is through the credit groups that meet regularly (usually quarterly) and are organized by either a regional NACM affiliate or another organizing entity. Similar to the industry-specific reports, NACM reports also provide industry-specific information, but on a more regional basis, and aligned tightly with the credit groups.
4. International Credit Reports – Perhaps the most fragmented category and difficult to navigate is outside of North America. There are hundreds of both regional and national providers across the globe, so choosing the best provider for your company will likely take some time investment. There are some bureaus like Graydon that simplify the process by aggregating several countries, but otherwise each country will have its own unique set of data providers.
5. Public Company Information – This is a broad category and applies both domestically and internationally. It includes financials, debt ratings, news, stock fundamentals, and any other generally available information on public companies (or companies with public debt). Information in this group can be compiled from a variety of free services on the web such as Yahoo!Finance or through pay services such as CreditRiskMonitor or Reuters.
Depending on the make-up of your customer base, a blend of all five data types (general, industry specific, credit group affiliated, international and public company) will provide a best practice approach to credit risk management. In order to select the most appropriate data for your credit decisions, you need to consider several factors.
Choosing the Appropriate Data Source for Your Decision
Selecting the most appropriate data for your decision depends on many factors and one of the most important of these is the type of credit risk in question. If it is a new account, you will have no payment history on which to base a decision, so you will require a third-party perspective. While some vendors would argue that they provide the best data in all five categories, using a blended “multi-bureau” approach will generally allow a credit department to improve its credit decisions at a lower cost. Analyzing existing accounts will follow the same logic as new accounts; however, most companies will also incorporate internal pay history in their decision/scoring models. It has been repeatedly demonstrated that how a customer has historically paid you, is the best indicator of future payment performance; so blending both internal pay performance with external bureau data will give you a clearer picture of payment/default risk.
Putting It All Together: Automating the “Multi-Bureau” Process
Choosing when and where to use each of these sources of information could be a daunting process, and potentially difficult to manage and enforce company-wide. However, software enables the credit professional to input a credit policy and let the rules manage which data source is most appropriate. Consistently applying a credit strategy using multiple bureaus will result in tremendous cost and performance gains. Software vendors such as eCredit, CMS and others can give you multi-bureau access and help your company develop an approval strategy that allows you to consistently pull the best data at the lowest cost.
Today there is more information available than ever before; your company has many options in choosing the best data. Many factors determine which data source is right for a particular customer’s credit decision. These factors usually boil down to cost, relevance of data (e.g., specific to my industry/group), quantity and breadth of data.
Automating Your Credit Decision Process with IDEA eCredit
As an IDEA customer, you can take the first step in automating your credit decision process by taking advantage of IDEA eCredit (IeC) reports, a service offered as an extra perk to IDEA customers. IeC provides customers access to industry-specific data as well as generic credit information at a cost that is 80% lower than traditional credit bureaus. IeC allows your company to:
- See how well your customers pay suppliers within your specific industry
- Learn how reliably your customers pay across all industries
- Get more details about your customers to help fuel decisions
- Improve the speed and quality of your credit decisions
- Access flexible options that expand your capabilities, such as business system integration, automated bulk reporting, and more
To improve the quantity of data in IeC industry specific reports, IDEA requests that all companies in the industry volunteer Accounts Receivable data. By submitting this data at no charge, you will reduce the cost of each report you choose to run, and IeC will become more valuable to your company, your customers and the entire supply network.
Contact Lily Saad at (703) 562-4606 to begin the submission process and to learn more about the advantages of automating your credit decision process with IDEA eCredit.
Excerpts from Business Credit®