New credit reporting tools can help companies manage risk and increase revenue. Several newly enhanced specialized credit reporting products are available from various vendors to minimize risk, reduce bad debt, and expand revenue opportunities. It is important to select reports that fully support business objectives and avoid common pitfalls like relying on self-reported data. The quality and depth of data is crucial, and companies should ask questions about data coverage, predictive accuracy, and data sources to ensure reports will provide useful answers.

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Credit Reporting Gets a Boost
By Adam Ortlieb
Adam Ortlieb
New credit reporting tools, many ofthem automated, can help companies manage risk and increase
revenue opportunities.
Several newly enhanced and specialized credit reporting products are now available from various vendors,
which give companies effective tools to minimize risk, reduce bad debt and even expand revenue
opportunities. Because not all products are appropriate for every situation, however, companies should
spend some time exploring the alternatives. When selecting reports, it is important to avoid common pitfalls,
such as failing to identify those with self-reported information. Most importantly, you should focus on
identifying products that fully support your business objectives, and probe vendors to explain and quantify
the quality of data being offered.
Will I Get Paid?
The most common goal for business credit report users is to determine whether potential customers are
creditworthy. While a standard business credit report might provide sufficient information to answer this
question, it is crucial to realize that complex business issues typically require more specialized solutions.
Below are examples of today's more complex credit issues, focusing on a hypothetical vendor, XYZ, a
multinational high-tech hardware and software vendor. XYZ has multiple business units, selling data
storage devices, servers and software.
1. Challenge: Currently, credit approvals for XYZ equipment leases and license-based deals are
issued by multiple finance managers in different regions. Credit evaluations tend to vary by
individual, resulting in significant discrepancies in amounts approved and higher than expected
costs, based on the time required to review applications.
Solution: To address these issues, look for a highly accurate and specialized predictive score for
delinquency. Ideally, this would accompany a standardized credit approval decision matrix- to
improve consistency and reduce the amount of resources currently dedicated to making credit
decisions. This process may help increase revenue by identifying customers that can be extended
more credit without adding significant risk.
2. Challenge: XYZ's credit approval process is further complicated because the product development
team has recently released a series of more affordable bundled solutions, targeting the low-end
market. As a result, many more applications are coming from smaller companies and startups,
which lack sufficient commercial credit history.
Solution: When commercial credit data is not available, look for an alternate source of information,
such as the personal credit history of the principals.
3. Challenge: To speed time-to-market for a new hardware design, XYZ has decided to source
hardware components externally, including a highly complex, customized data routing module
supplied by a relatively new startup without a strong financial track record.
Solution: Look for a credit monitoring product to help ensure that this startup vendor will continue

2. to meet its global supply chain commitments. This solution should provide email notifications based
on your chosen event notification triggers, such a bankruptcy or judgment.
4. Challenge: XYZ must make a relatively quick decision on whether to switch to a lower-cost
Taiwanese vendor for supplying crystals and other commodity parts used to make motherboards.
Solution: Look for an international credit report (delivered online) to help the finance team make a
near-term recommendation on the risks of partnering with this supplier.
Fortunately, companies that compile and maintain commercial credit databases have recognized these
needs, responding with more specialized reports and products. For larger companies, tools are now
available to support the credit decision process, streamlining the time required to process information more
consistently. Typically, these solutions incorporate more advanced and statistically accurate predictive
scores for an initial decision, with detailed supporting information provided for "gray area" customers
requiring further analysis. Industry-specific reports (such as teleqommunications or commercial leasing
products) are also now available, providing new options for evaluating myriad customers and suppliers. In
addition, international credit reports from most countries can now be delivered more rapidly via the Internet.
Small Business Customers
According to the U.S. Small Business Administration, small and medium-sized businesses make up more
than 95 percent of the total business population, with a high percentage securing credit based on personal
guarantees from company owners. To address the need for predictive information on these small
businesses, a number of blended reports have been developed, incorporating credit data from both the
business and its principal(s). Because these products include consumer credit information, however, they
are regulated under the Fair Credit Reporting Act (FCRA) and typically require additional authorization
milestones be met before you can purchase reports. For complete text of the FCRA, see
www.ftc.gov/os/statutes/031224fcra.pdf.
Monitor Customers to Eliminate Surprises
A century ago, an Italian economist named Vilfredo Pareto obseNed that 20 percent of the Italian people
owned 80 percent of the country's accumulated wealth. This phenomenon is commonly referred to as the
80-20 rule, and it applies in many companies that derive the majority of their revenue from a small subset of
easily identified customers. This concentration of sales activity presents significant financial risk if one or
more of these high-profile customers were to experience a financial crisis, such as a judgment or financial
default. In a more extreme scenario, a sudden loss of revenue could affect quarterly revenue performance,
potentially impacting a public company's stock price.
To minimize the impact of such an event, account monitoring/notification services are now available. Many
companies currently using such seNices liken them to an early warning system (or insurance policy) for
receivables, providing immediate notification that a key customer has experienced a major credit-related
event. The value of a notification service is the ability to be more proactive when a customer is in trouble,
versus finding out at the end of the accounting period that your largest customer will not be placing any
orders. The Risk Management Association quantified the return on investing in this type of service, noting
that several leading banks estimate a return of more than 1,000 percent over a 10-year period for advanced
portfolio management.
The more robust account monitoring services provide greater flexibility in selecting:
• The number of accounts to be monitored.
• The frequency of notifications (daily if necessary).
• Event triggers from an extensive list of options.
• Whether to monitor consumer credit information on the company principal(s) from small businesses.
(Subject to FCRA rules, based on the inclusion of consumer credit information.)
To maximize the effectiveness of this service, companies should select only credit events that will motivate
them to take immediate action once an alert is received. By not filtering out less important information,
users risk being overwhelmed by less urgent notifications, diminishing the benefits of the service.

3. Account monitoring services can also be used to sharpen supply chain management practices. Companies
operating on a just-in-time manufacturing schedule, with globally integrated suppliers, are often exposed to
substantial risk because operations are so dependent on these outside vendors. As a result, any advance
warning that a key supplier may not be able to meet production requirements can be vital.
Not All Reports are Created Equally
Commercial credit reports, such as those provided by Experian, Dun & Bradstreet and Equifax, can provide
a wealth of information about companies and how they manage financial obligations. Common data points
include:
• payment history
• public records (including liens, judgments, and other derogatory information)
• payment trends
• trade balances
• predictive scores for delinquency
• financial statements and analyses .
• UCC filings (required when company assets are pledged as collateral)
• commercial finance relationships
• background information about each company and its principals.
Although much of this information can be extremely useful when evaluating a company, it is important to
note that many reports include self-reported information. That means that some of the data you are relying
on may have been supplied directly by the company you are evaluating, not by an objective third party.
When selecting reporting options, you should carefully identify fields comprised of self-reported data, and
weight them accordingly. One solution is to avoid using reports with self-reported data when assessing
privately held companies, or small to mid-sized firms, with information published under less scrutiny
internally.
Data Quality: Will It Give You Answers?
Aside from the breadth of information included in reports, it is critical to understand the depth of information
available, emphasizing the factors that directly impact your business. There are pros and cons to every
vendor, but you will want to focus on understanding how reliable the information is for supporting the
decisions you are held accountable for. Some important questions are:
• How many trade lines are maintained in the database?
• How frequently is credit line data updated?
• How strong is collections information?
• How extensive is the public record information?
• How well is your geographic region covered?
• How predictive is scoring information?
• How much information is available on principals, officers and executives?
• How well are small businesses covered?
• What data (if any) is self-reported?
• How easy is the vendor to do business with? (How competitive is pricing? Are contracts required?)
• What is the process for contributing data if desired?
By asking these important questions, and insisting on statistics to support the answers, you can be more
confident that the information you are buying will help you better manage your business.
Adam 011/ieb is General Manager of Nielsen Information Co. He can be reached at BOO. 596.8699 or
adamo@nielseninformation.com.