Getting Results With Industry Credit Groups

Credit & Financial Management Review, 2004 by Herer, David

Abstract

Credit managers routinely use credit bureau reports as a source, and at times, the only source, of data for determining the creditworthiness of a customer. These reports may provide general and dated information on a company's financial position and credit history from various unidentified sources. In recent years, commercial credit reporting agencies have enhanced their offerings with items such as credit scoring, on-line access, and links to websites containing public record information.

These one-size-fits-all credit information solutions fall short, however, when it comes to providing the industry-specific information credit managers need to round out a customer's financial profile and payment history. And, in this age of increased competition and narrowing margins, sole-sourcing your credit information can be an increasingly perilous habit.

Recognizing the limitations of traditional generic trade reports, credit professionals are discovering that membership to industry credit groups fills the gaps by helping them develop more complete credit histories on customers. The net result is a faster, more accurate, cost effective solution for managing the risks associated with extending credit.

The industry credit group is certainly not a new concept. These groups have been around for over 100 years; the first being established in 1875 by a group of stationery and office equipment merchants. Today's technology has drawn increased attention to the benefits of such groups. Using the Internet as a platform, members can easily exchange and access up-to-date credit information on customers and prospects. Word on the street is that industry credit interchanges are a trend to watch in the future of credit management.

What is an Industry Credit Group?

A credit group is an association of credit professionals representing leading companies in a particular industry that join together to share factual credit information on a common customer base. These groups are unique in the credit industry in that they are usually member-driven. Members take a very active role in drafting the rules and responsibilities of membership, development of the marketing strategy, deciding exactly what information is to be shared, and setting the cost of membership.

Participation in the confidential exchange of credit data provides members with access to valuable information for evaluating credit risks and thereby minimizes collection problems. As important as the data itself, the industry credit group affords the member a rare opportunity to "get behind the numbers." Unlike agency credit reports, members of an industry credit group can design their group's interchange to identify the source of the experience in question. Members routinely contact each other to verify experiences reported and to benefit from a full explanation of all pertinent facts. Dave McGraw, Director of Credit for Decorative Concepts and Chairperson of GAIN (Gift Associates Interchange Network) relates, "I personally know that the best information comes from making good industry contacts and there is no better place to establish these contacts than a credit group."

How Does a Credit Group Work?

Groups form to pool information relating to payment habits, financial history, deterioration and improvements in the historical behavior of mutual customers. Members submit accounts receivable aging and other trade and credit experience to the interchange database on a monthly basis. The managing company or service provider compiles member data, generates credit reports and provides this collective intelligence to the membership.

Only historical credit information is shared. The format and level of detail will vary based on the needs of each group. Generally, this includes accounts receivable experience broken down into aging buckets, high credit extended, date of first and last sale and average days slow or average days to pay. Members share urgent customer events daily. These "Flash Notices" or "Alerts" report facts regarding customer bankruptcy filings, placed for collection or final demand notices sent, changes in ownership or location, NSF checks received, payment promises broken and general slowing of payment trends. Debra Brassier, Director of Credit Gund, Inc, shared the following experience with a national credit group:

"We received a flash notice from a member advising that the CFO of a mutual customer had recently stated that they were only making $100 payments per month to all of their vendors. We had over $5000 in orders being loaded on the truck for shipment to this customer. Due to this flash, that order was removed from the truck. That one flash more than paid for my membership to the credit group for the next several years."

The functionality of the interchange system and the value generated from the data depend on the vision of the group and the technological capabilities of the provider chosen to service the group.

Participation requirements are determined by the group and communicated through the by-laws drafted by members. It is the consistent reinforcement of member goals and objectives as enforced through the by-laws that will determine the effectiveness of a credit group. Generally, A/R data is required to be submitted monthly; members must regularly provide urgent customer information and participate in a designated number of meetings within a given period. A group may waive meeting requirements for a higher membership fee.