Free Online Course in International BusinessThe Purpose of a Credit ReportThe credit report has become an important economic tool in the process of a credit investigation and subsequent analysis. Without this instrument, many sellers would not be in a position to evaluate the ability of a company to pay in accordance with the contracted terms.Without a credit report, sellers would either sell on a type of secured transaction (usually requiring a letter of credit, or prepayment, including wiring funds in advance of the sale of the goods or services to the buyer versus allowing the buyer 30 to 60 days or longer to pay. Many people believe the economic growth of any country is dependent on the ability of businesses to buy goods or services on a basis of "pay later." Without the availability of credit reports, sellers should be concerned if they will be paid and when they will be paid. There is an old maxim: "The sale is not complete until it is paid for." Without credit reports, a seller could record revenue (sales), but unless there is a tool to evaluate a buyer’s history and ability to pay at a future time, the recorded sale could become a bad debt for the buyer without the sale ever actually being realized. The ability to provide credit to buyers plays an integral part in the world economy. If business on a worldwide scale was on a cash and carry basis, business as we know it would not exist. Those sellers who wanted to "grow their businesses" recognized early in history that a "promise to pay" was one way to allow buyers to take more goods or services than immediate cash might permit, re employ the goods or services in their own business, generate funds, make a profit, and pay the seller according to agreed upon payment terms. ( Improving Credit Practice," Miller and Relkin, AMA, 1991.) Direct Sources of Credit InformationWhich type of investigation is the best depends, as you may have already guessed, on the situation. So, if a seller’s international credit managers choose to use a direct investigation as the approach, or even just some aspects elements of a direct investigation, they are going to need to know a little about the sources of credit information they can use and how they may go about collecting it.The BuyerTo initiate a credit investigation, always begin with the buyer. A tactful way of soliciting this information is for the seller’s business to initiate an exchange of antecedent and financial information between the seller and the buyer. At best, the buyer may volunteer valuable data, including financial reports, a detailed biography of the principals, and a history of the business going back over several generations. At worst, the buyer will provide no information at all, feeling that such a request reflects upon the integrity of the principals. As a result of differences in accounting methods, international financial statements cannot generally be analyzed in the same way as domestic statements and often are not as easy to obtain as in domestic situations. They are also difficult to evaluate because accounting practices and tax regulations differ widely from country to country. The time required to gather information is greater than in domestic operations, so many international credit managers build a comprehensive file of information on prospective foreign buyers so they may make quick decisions when necessary. Credit information sources range from the buyer to the comprehensive economic and business data compiled by U.S. government agencies, by the international departments of banks, by private trade promotion organizations, and by publishers and organizations that foster foreign commerce.Direct CorrespondenceDirect correspondence is the most common basis for contact with all buyers. Opening accounts presents an excellent opportunity to set a tone that will keep a buyer providing credit information. Today correspondence can be conducted by telephone, facsimile (fax), and e mail, as well as through the US Postal Service. However, an international credit manager must use discretion and match the medium with the nature of the communication.Request for Financial StatementsThe best place to put a request for financial statements is in the credit application. The application should have a requirement for a customer to provide regularly audited financial statements or to provide them on request. Enclosing a blank financial statement form with the application serves several purposes. It reveals to a buyer that supplying financial information is indeed a common practice; it makes it easier to comply with the request; and it helps ensure that all information desired by the credit department will be submitted. The use of a standardized form also makes analysis of information easier. It is particularly advisable to send a standard checklist of questions rather than an individual request when a follow up is necessary to amplify items on a statement already submitted.
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