Sources of Credit Information PDF

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Sources of Credit Information It is expected that when a firm tries to loosen its credit standards, new sets of prospective customers will start flanking to get orders. And when it decides to do so, the firm has to choose whether or not to give trade credit to these customers. When new customers place their orders, the firm, knowing little information about them, will be reluctant to extend credit. The company has to gather credit information that will help it decide whether to grant credit or not. Listed below are some of credit information that the company may use in making a sound decision. 1. Financial Statements. It is not unethical for companies to ask for the customer’s financial statements, especially if they are not too familiar with the customer’s company. Financial statements could provide a good credit analysis for firms that intend to get credit. Financial ratios like liquidity ratio, asset utilization, and profitability ratio can give an initial impression if the company s capable of paying its credit. 2. Credit-rating agencies. Reports from credit-rating agencies is another important source of credit information. These credit-rating agencies sell information to subscribers containing the credit performance of many companies from different industries. In the Philippines, a well-known credit-rating agency is the PhilRating. With an increasing demand for information, foreign firms like Standard and Poor’s and Merill Lynch are also present in the country. 3. Commercial banks. Another good source of credit information is commercial banks. As a form of service to their clientele, banks give credit information to their customers. The customers only have to make a formal request to the bank concerned. Although banks do not give the specific information, particularly on deposit balances because of the deposit secrecy law, the banks will give out data on whether the company has a good credit standing with them or not. 4. Trade checking. Trade checking could be done by asking the prospective customer their list of suppliers. These suppliers could provide first-hand information on their personal experiences with the prospective customer,

particularly how much maximum credit has been given, and the customer’s promptness in making payments. Collection Policy Collection policy refers to the guidelines on handling receivables in terms of monitoring and collection. A well-established collection policy has a crystal-clear procedure as to the sequence of collecting the accounts receivable (Keown, Martin, and Petty, 2006.). The process usually starts by sending a billing statement when the due date is near. When payment is not received on the due date, another letter is sent to inform the debtor that its account is not yet paid. Sometimes, telephone calls or even personal visits are made to assure collection of the overdue account. If the balance is still not paid, a collecting agency is hired by the company to make an aggressive move to collect the overdue account. The collecting agency is normally paid a fixed rate plus a certain percent of the amount to be collected.

The collection process is expensive. People have to be hired to monitor and record the receivables, and to make collections. Supplies are also needed for the letters, and telephone bills have to be paid. To some extent, the firm has to face cost of services rendered by the collecting agency and lawyers in the process of litigation. Changing the collection policy affects the sales, the collection period, and the bad debts losses. For the firm to implement a change in collection policy, a carefully designed system should be established. It must ensure that the benefits of implementing the system are not overshadowed by costs. The effectiveness of the policy can be partly evaluated by looking at the level of bad debts expense against the return generated by a change in policy....