Personal Credit Histories Reveal Hidden Risks
Tuesday, April 11, 2006
Personal Credit Histories Reveal Hidden Company Risks
Almost one in four Australian companies has a director with a bad personal credit history – but the information is often hidden from view, a study by Australia’s leading credit information and business intelligence company Baycorp Advantage has found.
Baycorp Advantage found only four per cent of credit-active companies has some form of bad credit information recorded against them in the company’s credit history.
But 13 per cent of companies have a director with derogatory information entered in their individual commercial credit history file, and 22 per cent of companies have directors with a bad personal credit history.
One company which applied for credit had no derogatory information against it – but its main director had defaulted on debts of more than $600,000, set up new companies and changed her name five times.
Another company which appeared to have a clean bill of health had directors who had failed to pay more than $1.08 million in debts, with 14 separate court judgements against them.
Baycorp Advantage Business Information Services general manager Erica Hughes said many companies did not check far enough into other companies’ credit histories before granting them trade credit or finance.
“Baycorp Advantage has found that one in three companies which default on a credit payment have a director who has previously defaulted on a personal debt,” she said.
“Yet many companies fail to check deeply enough into a potential customer’s credit history to discover whether they are a credit risk.
“A company may have no derogatory data on its own credit history, but the directors’ personal records may indicate that the company’s officers have a pattern of not paying their bills.
“Not checking can have a crippling effect on a small business’s cash flow if the debt is defaulted on, or late in being paid.”
Ms Hughes said a director’s permission was needed before their personal file could be checked.
Baycorp Advantage undertook the study as part of the launch of DecisionFlow, a new automated tool which helps businesses make decisions on granting trade credit.
DecisionFlow dramatically decreases the time a company needs to take to approve credit for a trade customer, with much greater detail.
“Credit managers need to have greater detail at their fingertips these days, but it needs to be the right detail,” Ms Hughes said.
“About 40 per cent of all trade credit applications will fail to show the customer’s correct legal identity.
“It may be something as simple as an incorrect ABN, or as serious as a business which hides directors’ identities through a web of aliases.
“That flows through to trying to collect a debt – in up to 70 per cent of cases where a commercial credit debt is referred for collection, the legal identity of the debtor is in doubt.
“To be a successful business you need to be on top of both good and bad debtors - nurture the good ones and track the bad ones.
“We all know the good debtors because we watch the cheques come in – it’s harder to find the time to track the bad debtors.
“And if you don’t track them they can do more harm to a business than good customers can reverse.”
Baycorp Advantage’s study found 50 per cent of Australian companies did not safeguard themselves through regular checks of customers on their debt ledgers. Only 19 per cent of companies used an alert service to advise them of a potential credit risk.
Trade references were gathered on about 62 per cent of new customers.
Ms Hughes said tools like DecisionFlow made it easier to look back into the secret credit history of a company.
“Often up to 40 per cent of a company’s assets can be tied up in debts owed to it,” she said.
“DecisionFlow helps companies to ensure those debts are recovered within the terms of the credit agreement.
“It does that by allowing businesses to pull together data from all across Baycorp Advantage’s commercial and personal credit files to build an accurate picture of a potential customer’s credit risk.
“It is the culmination of our years of experience of providing business intelligence to banks, financial institutions and trade credit suppliers.
“DecisionFlow helps to ensure that a company will have less debtors, and credit management staff will have the time to follow up the debtors it does have to improve cashflow rather than spend time trying to approve an application.
“DecisionFlow is a web-based system that allows credit managers to quickly approve or reject a trade credit application.
“It still allows a credit manager to personally inspect the data and approve or reject an application, but it puts in place a series of data filters to make that job easier and more exact.
“We are also trying to make it easy for credit management departments to make risk decisions by reducing the complexity.
“By making it easy to understand, credit decisions are consistent across the business.”