More than four years after the peak of the U.S. financial crisis, bankers, businesses and borrowers still remain cautious about their exposure to risk.
In a recent survey, only about 6 percent of senior loan officers at U.S. banks said that credit standards for commercial and industrial loans or credit lines had eased over the past three months. Instead, most respondents said that standards were basically unchanged. And among banks that had eased credit standards or loan terms, it was more often due to aggressive competition from other lenders -- not a more favorable economic outlook.
Credit managers outside of banking, too, are exercising caution in their own extensions of credit. The Credit Management Association found that 30 percent of respondents expected to tighten credit policies in the upcoming quarter. At the same time, corporate credit managers are under more pressure to evaluate credit because demand, as measured by the number of received applications, had picked up.
How can a business keep a pulse on the companies with which it interacts?
All too often, companies trust that a potential business partner is creditworthy with very little evidence to support the assumption. Ronald Reagan made popular the catchphrase "Trust, but verify" regarding the former Soviet Union, but the maxim is a good one for businesses considering new business relationships, too.
"Most [business-to-business] credit risk is really of a 30-, 60- or 90-day nature, so it's very short term," says Hugh W. Connelly, CFA, president of Univest Capital Inc., a small-ticket corporate finance business.
"As long as the customer pays their bills within 30 days, I don't think people even look at the creditworthiness of the customer. They just assume that because they paid their bill on time last month, they're going to pay their bill on time this month."
But that's dangerous. Many businesses examining a company's trade-credit history are evaluating data that is 90 days or older -- ancient by business terms, according to Connelly.
Connelly says payment histories can be valuable, but he recommends that credit managers shouldn't rely too much on them, either. Depending on the situation, it makes sense to perform a more thorough financial analysis.
If a company's risk appears to be above a given threshold or even if payment history is spotty, says Sageworks analyst Libby Bierman, deeper analysis like a review of financial statements or cash flow may be merited. Additionally, requesting and analyzing financials might be a necessary step in the review process for suppliers that are particularly crucial to the supply chain or for customers requesting credit lines over a certain amount.
Conducting due diligence on a supplier could also help credit managers "trust, but verify" the integrity of a supply chain, a significant operational exposure. "Checking a supplier's likelihood of default based on current finances could save you money and trouble," notes Bierman. "If they go out of business, you could be out of a key line of credit and a key supplier, or if they do not make their payments on time to their suppliers, that could affect your whole supply chain," she notes.
Michael Mazzarino, founding partner of strategic advisory firm The SCA Group LLC, says that in addition to quantitative verification, credit managers should consider qualitative checks. "It's extremely useful to get in a car or airplane to visit the supplier, partner or customer," he says. "You see a lot that you don't often see in the analysis of financial statements or projections."
For example, walking through a customer's warehouse may reveal boxes of very old inventory. "You may or may not have a problem with cash being tied up, but at least you have the genesis of a question," Mazzarino adds.
Our 2024 Coverage Needs You
It's Another Trump-Biden Showdown — And We Need Your Help
The Future Of Democracy Is At Stake
Our 2024 Coverage Needs You
Your Loyalty Means The World To Us
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
The 2024 election is heating up, and women's rights, health care, voting rights, and the very future of democracy are all at stake. Donald Trump will face Joe Biden in the most consequential vote of our time. And HuffPost will be there, covering every twist and turn. America's future hangs in the balance. Would you consider contributing to support our journalism and keep it free for all during this critical season?
HuffPost believes news should be accessible to everyone, regardless of their ability to pay for it. We rely on readers like you to help fund our work. Any contribution you can make — even as little as $2 — goes directly toward supporting the impactful journalism that we will continue to produce this year. Thank you for being part of our story.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
It's official: Donald Trump will face Joe Biden this fall in the presidential election. As we face the most consequential presidential election of our time, HuffPost is committed to bringing you up-to-date, accurate news about the 2024 race. While other outlets have retreated behind paywalls, you can trust our news will stay free.
But we can't do it without your help. Reader funding is one of the key ways we support our newsroom. Would you consider making a donation to help fund our news during this critical time? Your contributions are vital to supporting a free press.
Contribute as little as $2 to keep our journalism free and accessible to all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
As Americans head to the polls in 2024, the very future of our country is at stake. At HuffPost, we believe that a free press is critical to creating well-informed voters. That's why our journalism is free for everyone, even though other newsrooms retreat behind expensive paywalls.
Our journalists will continue to cover the twists and turns during this historic presidential election. With your help, we'll bring you hard-hitting investigations, well-researched analysis and timely takes you can't find elsewhere. Reporting in this current political climate is a responsibility we do not take lightly, and we thank you for your support.
Contribute as little as $2 to keep our news free for all.
Can't afford to donate? Support HuffPost by creating a free account and log in while you read.
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. Would you consider becoming a regular HuffPost contributor?
Dear HuffPost Reader
Thank you for your past contribution to HuffPost. We are sincerely grateful for readers like you who help us ensure that we can keep our journalism free for everyone.
The stakes are high this year, and our 2024 coverage could use continued support. If circumstances have changed since you last contributed, we hope you'll consider contributing to HuffPost once more.
Support HuffPostAlready contributed? Log in to hide these messages.