When apprehensive customers won’t share financial reports

As credit managers, your day-to-day work focuses on maintaining the delicate balance between extending credit to customers and protecting your company from potential risk. This determination hinges on your initial credit investigation, your first deep dive into a customer’s finances, payment habits and professional relationships. Financial records play a major role during the determination of creditworthiness, offering a well-rounded and comprehensive fact-based view into your customer’s finances.

Why it matters: Obtaining financial records from a new customer can be paramount in your credit investigation, with their finances holding the potential to sway you away from extending a certain level of credit or extending any at all. When customers are hesitant about sharing their financial records, it creates a tricky situation for credit managers to navigate as negotiations ensue, leaving them to ask, “Would I extend credit to a customer who won’t share their financial records?”

“Customers get apprehensive about sharing financial information for a number of different reasons,” said Kevin Stinner, CCE, CCRA, credit manager at J.R. Simplot Company (Loveland, CO). “You have some customers that are private individuals concerned about their information and net worth getting out into the community. And then large corporations or privately held corporations don’t want the worth of their company out in the marketplace because they lose the financial advantage of that information being secret.”

The decision whether or not to extend credit without seeing any financial records, like all things in the credit field, is contingent on a number of factors. “It really depends on the amount of credit needed,” said Ed Bell, CBA, ICCE. “For smaller amounts, we may choose to forgo the requirement to see financial records. For larger amounts, we would offer to sign an NDA or other legal agreement. If this still did not result in obtaining the financial records, we may ask for a full or partial payment upfront until a successful relationship has been established.” For those worried about privacy, a non-disclosure agreement might be the best path to gaining financial records.

“About 50% of customers push back when asked for financial statements, while others give them up on the first request. But on that second request, just offering to sign an NDA convinces a lot of people to share the information,” said Brendon Misik, CCE, CICP, senior manager, Ag credit at Nutrien (Hoffman Estates, IL).

While NDAs may help ease concerns about privacy, they might not always be enough for some customers, and for smaller accounts, they can be too much hassle. For Stinner, it is easiest to ask customers to send over the ratio of their current assets compared to their current liabilities, or maybe the ratio between the cost of their total assets compared to the amount of money they are generating in sales.

“If they’re showing $90,000,000 in assets, but they’re only generating $1,000,000 in sales, they are not being very efficient in their utilization of their assets and they’re a riskier customer than somebody generating $180 million in sales,” Stinner said. “Getting the real numbers is important, but these ratios get to the heart of what a company’s financials actually are.”

When a customer will not share financials, it leaves credit managers in a tough spot. A credit manager is now left to guess why a customer might choose not to share these financial records, whether it is merely a privacy concern or the fear that disclosing the financials would reveal their lack of creditworthiness.

While maintaining an account without having access to a customer’s financial records, knowing your customer is even more paramount, as the degree of risk is higher than normal. Frequent communication and customer visits can help mitigate risk in these tough situations. “I discovered a customer once who had two sets of financial records, one that was shared with their government and used to lessen their tax burden and one shared with suppliers to garner credit,” Bell said. “A personal visit confirmed his inventory claims and helped us make our decision.”

No credit decision is made in a vacuum; the decision to extend credit without seeing financial records should not be made without considering all extenuating factors. “You need to know the customer and look at all the other risk factors such as country, political, currency, cultural and economic factors,” Bell said. “Also, look at the industry and how their competitors are performing.”

The bottom line: Regardless of whether or not a customer will share financial records, it is vital that a credit manager uses all the information at their disposal when assessing a customer’s creditworthiness.