Garbage In, Garbage Out – Michael Dennis, CBF

Garbage In, Garbage Out

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
Michael Dennis, MBA, CBF, LCM

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

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.

11 Replies to “Garbage In, Garbage Out – Michael Dennis, CBF”

  1. Credit managers making business decisions is high risk and potentially career limiting. Michael Dennis and I have a mutual friend who lost his job after being required to make business decisions and then [not surprisingly] having one of those decisions result in a 7 figure bad debt loss for the company.

    This is not about avoiding decisions… it is about avoiding being painted into a corner in which there are NO good options.


  2. In our company I make credit decisions. We are a privately held corp and I don’t have access to all the business info needed to make “business” decisions. If an owner (VP’s of the Sales Divisions) decides to intercede, I give my input and they can make a business decision. My job is to keep the rest of AR as healthy as possible so if any of those business decisions go awry, it’s not devastating. Over time there are far fewer business decisions being made.

  3. Hi Michael,

    When it comes to credit decisions, they need to be reached at based on relevant and reliable information, after the proper degree of due diligence has been performed.

    When a basis for a credit decision is not found, then we can invoke the path of a business decision. A house cannot be built without laying the proper foundation.

    Credit professionals should be confident enough to tell management that due to the lack of information, a credit decision cannot be reached. The only avenue to pursue is the business decision path.

  4. Another option when faced with this is to follow up with references and participation in an industry credit group, if one exists for the trade that you are operating in. Often times an industry credit group may have done business with these types of customers and will share their experiences.

  5. I don’t make business decisions relating to credit risks. I implement the decisions made by management. If often surprises me how often the company President of the small company I work for somehow forgets that he approved a particular credit limit over my objections. Fortunately, I always document overrides so if the manure hits the cooling device I am able to prove what happened and why.

  6. Your suggestion does not always work. I tried something similar to:

    “Please provide me with guidance about how we should proceed in a way that minimizes risk”

    I was told:

    “It’s your job to make the tough calls if it is within your credit granting dollar limit.”

    I was also told and I am paraphrasing:

    “This is what we pay you for. We expect you to give us the answers to the tough questions like this one, not the other way around. We expect you to step up and deal effectively with uncertainties.”

  7. Christine,

    Thank you for your comments. My question to you (and others reading this) is whether you think that your boss was right – or wrong.

    In my opinion, you were right and they were wrong. In any event, you were able to voice your concerns and in my opinion that was the right thing to do in this situation.

    Michael Dennis

  8. Christine, you were right and your boss was wrong. Whatever happened to collaboration, or working for the common good? What happened to using questions from subordinates as an opportunity to provide insights and guidance and training?

    What is so strange to me is that there are usually not easy or obvious answers to many credit related questions. How are we supposed to know how to repond to questions and make decisions for the company about issues that do not involve a credit decision because the facts are not sufficient to support a credit decision? I would be tempted to reject every one of these requests

  9. In order for the credit department’s input to have increased credibility when decisions are made, they need to be able to document the results of any over-ride to their decision. What is the bad debt ratio without the accounts who were given credit over your objections and what is the ratio if they are added in?

    What was the total profitability of the accounts that were extended credit over your objections versus the losses incurred – – net of revenue (with a consideration for effort expended and any benefits of economies of scale). Are you better off or not? Was the cost of company resources better utilized elsewhere? Were there missed opportunities elsewhere because of the capital that was unavailable?

    Once you can prove the company’s bottom line is improved by following your recommendations versus their own, the less likely it will be that you will be in the hot seat. It goes without saying that sales has a rosey view of taking on new business.

    I am reminded of a movie I saw recently “Moneyball” starring Brad Pitt and Jonah Hill as executives of the Oakland Athletics baseball team. A roomful of the Oakland baseball brain trust made their evaluations on the talent pool of players. Much of the decision-making was gut-based and personal perception-based whereas Brad and his assistant Jonah looked at documented past history using mountainous data (read: verificable payment history & demonstrated ability/capabability). This counters any decision based on anedotal information or preference bias . Unfortunately, we rarely have the level of data they were able to gather.

    I am stretching the analogy to make a point that credit analysts are represented by Brad and Jonah and the brain trust is the sales side. Brad/Jonah made decisions to get the most bang for the limited buck and related to us it is not always the biggest or brightest customer or prospect.

  10. Something that comes across my desk. Without bank reference. Cashier Check or Credit Card.. Bank information is a part of the whole extending credit….

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