When it comes to your credit decisioning process, what do you see as the most important inputs? Well, if you’re anything like the 285 credit analysts and credit professionals we polled within the LinkedIn Credit Risk Group, your answer probably relates to credit reports or credit applications.
Specifically, 60% of poll respondents said a credit report and score is the most important input. Meanwhile, 28% said a completed credit application comes out on top. Only 5% chose bank account verification, while 7% shared their own answers.
For example, Chris Lehman, regional manager, credit underwriting retail at Cardinal Health in Columbus, Ohio, points out the importance of factors like cash flow, liquidity, leverage and whether there’s a secured position.
In this article, we’ll examine the importance of credit reports and credit applications in more detail, and we’ll also look at how these two elements can be used together to make stronger credit decisions.
Keep in mind, however, that these elements are only part of the process. To know what the most important inputs are when extending credit to buyers, "a review needs to be done of the overall underwriting process and expenses, expectation of default rates in the portfolio, collateralization of the vendor, expectation of repayment, etc.” notes Brian Probst, president of BA Probst Consulting, a risk management consulting service in Austin, Texas, specializing in mid-cap business and consumer credit underwriting.
He adds that the goal shouldn't necessarily be to completely eliminate any risk of default but to see how that risk fits within an overall portfolio.
As the top answer in our poll on credit decisioning, let’s take a closer look at the use of credit reports and credit scores in a business context.
A business credit report provides a history of a company’s debts, along with loan and supplier payments, similar to a personal credit report. In addition to providing credit history, these reports often include or complement a business credit score, which provides a rating of a company’s ability to repay debts. These scores tend to be calculated from credit report data.
Credit reports and credit scores typically come from third-party credit bureaus. Dun & Bradstreet, Experian, Equifax and CreditSafe are the major credit bureaus. However, some large companies create their own credit scoring models, and some fintech startups have also come onto the scene.
A credit report that shows a company has historically made payments on time can give financial institutions, vendors, distributors and other business partners confidence when it comes to credit decisioning. Similarly, a high credit score, whether that’s based on payment history or more nuanced details like cash flow or a broader economic outlook, generally indicates a high level of creditworthiness.
So, if a lender, such as a bank, needs to decide what interest rate to offer a client, a credit report and credit score could be major factors. Similarly, if a manufacturer, distributor, or supplier needs to determine payment terms for a customer — like cash terms vs. Net 30, or a specific credit limit — then credit reports and scores would help play a role in that credit decisioning.
Following credit reports and scores, credit applications rank as the next most important element for credit decisioning in our LinkedIn poll. These applications aren’t just a check-the-box formality. They can provide important credit insights that together with other inputs, like credit reports, can strengthen credit decisioning.
A business credit application is something that a potential borrower or business partner fills out to verify the company’s background and ability to pay its bills. A credit application can also be used as a legal document for the two parties — typically the seller and buyer — to agree to the terms of sale.
A traditional credit application was a paper, PDF, Word document or template that might include inputs for verifying a company’s identity, including:
However, digital credit applications have become the industry standard because they make collecting the data more efficient. Digital and software credit application management systems like Nectarine Credit offer automated ways to collect:
With these types of inputs and more, a credit application can help lenders, suppliers and others get a more complete picture of the business they’re extending credit to and whether that company is creditworthy. A credit report on its own might not be enough to ensure that you fully understand a customer’s background, so a credit application can help confirm key pieces of a company’s identity. A credit application can also help in areas like bank account verification and gaining a more complete picture of what the purchasing relationship might look like so that you can apply appropriate credit terms.
As our LinkedIn poll shows, both credit reports and credit applications are important inputs for credit decisioning. Yet it doesn’t have to be an either/or decision. Ideally, businesses would use both together, along with other inputs like getting to know a customer’s management team, to make better credit decisions.
“Especially for large credit requests or ones without recourse, the story we get from the financials must sync with the account we get from management. If they do not, then you have a credit with a higher degree of risk," says Mari Puga, a West Palm Beach, Florida-based financier for corporate and middle markets.
Even though a digital credit application can help you quickly verify customer details and gain a better understanding of their financial background, remember these are customers you'll be working with, not just names on a credit application.
“An algorithm can't build relationships. At some point, you will need to interact with the other person if you are looking for a long-term customer," adds Puga.
Keep in mind that while inputs like credit reports and credit applications can certainly point you in the right direction regarding potential borrowers, these elements don’t need to exist within a vacuum. The same credit score can mean different things to different banks or suppliers, depending on factors like the supplier’s own risk tolerance and financial circumstances.
Considering the importance of credit applications, businesses need a reliable way to send and collect this data. And considering the several other pieces that can go into the credit decisioning puzzle, the credit application process should be efficient too. Otherwise, you’ll have less time to dive into areas like understanding management.
That’s where digital credit applications services like Nectarine Credit shine. You can easily use a digital credit application template to create a fast, repeatable process. And you can keep everything organized in a straightforward dashboard that helps you stay on top of credit approvals.
See for yourself how Nectarine Credit can help you manage credit risk more efficiently and accurately.