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Our Subscribers Say...
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Fort Worth, Texas
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Making the Most of Investigation Time
One advantage of managing credit for a furniture manufacturer, notes Paula M. May, CCE, of Dinaire Corp. (Buffalo, NY), is having "a little more time" to research and establish creditworthiness than you have in some other industries. "I can put an order through as soon as it's received, but it still gives me a few days to verify credit before we actually have to ship," she says. "Wholesalers, on the other hand, often don't have that kind of time."
Having time and using it well can be two different things, of course. In May's case, she takes advantage of every minute. Her two major tools are an extraordinarily comprehensive credit application and a knack for creativity in locating and checking references.
Credit Application
"Customers' willingness to provide information is at its greatest when they place their first order," she notes. "Later, once they're already established--or if they are getting into payment problems--they may be reluctant to provide information that you could have gotten up front if you'd persisted."
May's credit application contains and asks for all the standard basic information. What makes it unique and especially valuable, though, is the additional information she seeks and the additional wording she adds. These include . . .
The amount of credit. The application has six choices (ranges) of credit for which new customers can apply. "Based on the box they check, it gives me a good idea of the level of business they intend to do with us," she explains. The information also lets her know how thorough she will need to be in her credit investigation policy. A new customer seeking the highest range of credit line would obviously require a much more thorough investigation up front.
Personal information. May also asks for the Social Security numbers, home addresses, and home telephone numbers of the customer's owner(s), partners, and/or principle(s). Based on wording the customer agrees to later in the application (see "Authorization" below), May receives permission to pull personal credit reports on the owners, partners, and/or principals.
The Best Credit Departments in the World
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Credit Department Profiles
Yes, that's what you'll read about Credit Today's exclusive Credit Department Profiles section. You'll learn what's working at credit departments ranging anywhere from Fortune 50 operations to those with just one (overworked) person. Just a few of the world's leading credit departments featured include Campbell Soup Company, Georgia Pacific, Serta Matress, BJ Services Company, USA, Hachette Filipacci Magazines, VF Jeanswear, USXpress, and Canon USA.
Credit Department Profiles
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"By seeing how they handle their consumer credit responsibilities, I can learn a lot about how they'll handle their commercial credit activities," she explains. Recently, for example, May pulled the personal credit file of the owner of a new company who had applied for credit with Dinaire. "I discovered that he had filed for personal bankruptcy two years ago and also had two sales tax judgments against him," she says. "Obviously, I didn't extend him an open line of credit!"
Rental information. If the company operates on rental property, May asks for the name, address, and phone number of the landlord. She then calls the landlord to see how well the customer pays his rent. "It has been my experience over the years that if a company that rents its property gets into trouble, one of the first things they stop paying is rent," she notes.
Security information. She also asks if the customer
- has signed any security agreements previously,
- has pledged any of their receivables, and/or
- has any of their inventory secured.
"This tells me whether I can go after a UCC-1 filing or if I might need to get a personal guarantee instead of being able to offer an open line of credit," she says. That is, if it turns out that a lot of the inventory is pledged or there are a lot of filings against the customer, May is less inclined to offer a large credit line.
On the back of the application, she asks customers to list all their security and pledge agreements, along with the names of the people. "I may contact these people to see if they would allow us to secure our own inventory at the customer's location," she says. "If this is the case, then I may be able to grant a larger credit line."
Bank information. Next, she asks for banking information, specifically the name and phone number of the customer's loan officer or bank contact person (if the customer has a borrowing relationship with the bank).
If the customer does not seem to pose a risk, May will fax the standard Robert Morris Associates form (with some modifications) to the bank, asking for account information. She will also fax a copy of the paragraph on the application where the customer agrees to allow the bank to provide this information (see "Authorization" below).
If the bank responds by requiring a "standard fee" for the information (usually $10 to $15), May will forward a form letter to the bank's president and the applicant explaining that the credit process is really in the best interest of their mutual customer (the applicant). "This usually takes care of the problem, and the bank waives the fee," she says.
If the customer does seem to pose a risk, May will make phone contact with the person whose name the customer lists on the application. "I've found that most of them are very willing to talk and explain what kind of customer he or she has been on a personal level," she says.
Financial information. Next, May has a section where a customer can check off one of three options, related to providing a financial statement . . .
- Statement enclosed.
- Will furnish on request.
- Unavailable (if so, state reason).
Many customers are willing to provide a copy of the statement with the completed credit application. Many others, though, check the "Will furnish on request" box. When May receives one of these, she immediately mails out a form letter to the customer asking for a copy of the statement. The letter emphasizes the importance of receiving the information, explains what it will be used for, and stresses that the information will remain strictly confidential.
"It's amazing how many customers will provide the statement at this time," she says. Her take on the situation: "I think customers just hope that you won't pursue it, but when you do, they're willing to provide it."
One of the many things May uses the statement for is to verify that the average daily balance the customer lists on the statement compares with the information she receives from the customer's bank (above).
Additional Requests
This summarizes the additional information May seeks from new customers. Then there are additional requests she makes of new customers on the application--requests that, when signed by the customer, allow May to perform her job more effectively. These include . . .
Returns. Customers wishing to return merchandise due to defects or any other complaints must first notify Dinaire, receive authorization, and then make the returns within 45 days of receipt. "This process is common in the furniture industry, but we want to make sure customers understand that we abide by it and that we expect them to abide by it, too," she says.
Collection activity. Customers acknowledge that they agree to pay within Dinaire's published payment terms. In addition, if Dinaire is required to turn the customer over for third-party collection or legal action (attorney collections or lawsuit), they agree to pay the reasonable costs associated with these actions. "The paragraph also specifies where the venue will be," May adds.
Authorization. The final paragraph above the signature is one that May feels is particularly valuable. It states: "You are authorized to check information submitted as well as all other sources available and answer questions about your credit experience with us as requested by others.
"This is the statement that gives me permission to pull up their personal credit reports," she notes.
Getting References
May belongs to the "Furniture Manufacturers Credit Association", which has about 150 members. "I find I can usually get a lot more credit information on new customers from this group than from commercial credit reporting agencies, or by calling the references that the customer provides, which will of course always be their best references," she says.
Besides being able to provide comprehensive and detailed credit information on customers of the furniture industry, the association offers another feature, online access to the information.
If you do not belong to an industry group, or if one does not exist for your industry, be creative. "When I worked in another industry that didn't have a credit group, I simply began logging all the names, addresses, and phone numbers of companies that contacted us for credit references on customers," notes May. Over time, she developed a rather comprehensive list of her own that she could contact.
Some other information sources she uses are . . .
The Internet. Taking advantage of the latest technology, May uses the Internet to access copies of publicly held customer companies' 10-K or 10-Q reports. She offers a word of caution to credit managers considering this source, however. "Either be sure you have a high-quality, quick printer, or be ready to turn your printer off when you get enough information, because these reports can be long!" she says with a laugh. To verify the addresses of the principals and the business, May also accesses the Yellow Pages or the Big Book.
State governments. May has also created a form letter that she sends to the secretary of state in the state where the customer is incorporated, asking for a copy of the corporation's registration. "This lists all of the officers of the company," she notes, "and some states also provide financial information, which they require from companies on a yearly basis."
Timing
How long does all of this take? One might think weeks, but May is able to get virtually everything she needs within five working days.
"If I receive a credit application from an existing company, I'll enter the order when we receive it, then get my investigation done within five days, which is sooner than it takes to manufacture and ship the order," she says. If, on the other hand, she receives a credit application from a new company, she will hold the order until her investigation is complete.
Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006.
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Outlook 2012
This month's survey explores...
- What the top problems are facing credit execs currently, and
- What the top improvement initiatives are.
Click here to participate!
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