A friend of mine asked for my comments about a scenario in which an applicant stated it was their company policy not to release bank information to any creditor. I responded that my concern is the applicant has something to hide. Examples include a loan default, low account balances, NSF checks, or loan covenant violations on their outstanding debt. Requesting bank information is normal – as normal as requesting trade references from the applicant.
Her underlying question was more nuanced. She asked: How can I make a good credit decision in the absence of basic information? The answer is of course that she cannot do so. My recommendation was that she refuse to do so, and I suggested that she frame the response to her manager this way:
- I am trained to make sound credit decisions based on adequate but not necessarily perfect information
- I am not trained nor authorized to make guesses based on incomplete and inadequate information, and the information I have gathered is incomplete and inadequate to make an informed decision
For this reason, I am forwarding this to you to request that you:
- Approved the requested credit limit and payment terms, or
- Reject the applicant, or
- Provide me with additional guidance or instructions about how we should proceed in a way that minimizes or more accurately optimizes the relationship between risk and reward.
Occasionally, a manager will counter that the credit department must make its best decision based on the available information, whether or not it is complete. In my opinion, it is important to push back. When I have been given this assignment, I have responded that I will require training and guidance relating to:
- What facts and factors go into making business decisions
- How these decisions are documented to make it clear that the decision to extend credit was not based on standard or sound review of appropriate information
- Who must approve business decisions in the organization
- Whether higher bad debt reserves should be established for these accounts if open account terms are approved
- Whether management wants reports showing the amount of credit extended based on credit approval vs. business decisions
- Whether my performance evaluation will be negatively affected if one of these business approvals goes south and we are unable to collect
Using these tools, the risks described are at the very least shared by the credit decision maker and his or her managers. This can be quite helpful for the credit department if losses start to add up on these marginal accounts. That’s my opinion on this issue. I would welcome your comments.
Michael Dennis’ Covering Credit Commentary. Michael’s website is www.coveringcredit.com.
The opinions presented are those of the author. The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors. Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.