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Small businesses ‘technical competence’ in granting credit called into question

2 December 2009

The ‘technical competence’ of small businesses to make informed decisions on credit has been called into doubt by an industry Think Tank led by the Institute of Credit Management (ICM).

A previous over-reliance on credit insurance and credit reports and the ability to deflect risk decisions to a third party, has left many businesses poorly equipped and ill-prepared to take decisions themselves, according to the group of credit experts.

Andrew Share of Coface, a member of the ICM Think Tank, believes the current situation is virtually unprecedented: “Previously businesses may have relied upon their insurers for credit decisions, but with limits under pressure, some are finding the task of making their own decisions a challenge.”

Andrew agrees with Martin Williams of Graydon UK in that part of the problem – and the solution – rests with the credit reference agencies and access to more reliable financial information. “Credit information is a part of the credit granting process,” says Martin, “but it is how that information is intelligently applied that is important. Many tell us that they see the value, but with the exception of certain sectors such as steel or petroleum, this is rarely reflected in the amount of money and time they are prepared to invest.”

Kate Sharp of the Asset Based Finance Association (ABFA) thinks that some credit departments are not as robust as they might be: “Anyone who thinks that they just have to throw a credit intelligence report into the mix and say that they have done their job is very much mistaken,” she adds. “My fear, however, is that when the economy recovers, too many companies will simply return to the old ways.”

Philip King of the ICM thinks that part of the problem is a cultural one. “There are credit managers, and there are book-keepers,” he says. “It may sound counter-intuitive, but if you haven’t ever had a bad debt, then perhaps you are not adding value to the business in the way that you could?”

Philip also says that those who grant or refuse credit on ground of ‘gut feeling’ are probably selling themselves short. “If you see dust on boxes in a warehouse it might tell you how fast product is shifting off the shelves,” he says. “But is that gut instinct, or using your expertise and judgement?

“The problem is that we have a culture that does not always allow for mistakes and entrepreneurialism amongst credit managers, and this has got to change.”