Measuring Credit Risk: Purchase Behavior is a Window
For many credit managers, determining credit worthiness often starts with unearthing the payment history of the company in question.
Payment history is typically found through subscription services, online resources and public records. Press releases, industry surveys, news articles or industry research data can be revealing sources for a great deal of other useful information, as well.
While it’s true, the credit manager is doing his job well by analyzing a company’s payment history, in truth, more data of that nature probably won’t tell you all you need to know about a company’s overall financial health.
If you want to see into the financial soul of the company, purchase history will tell you far more of what you want to know than payment history.
Predicting the future isn’t an exact science. But it becomes a bit clearer when purchasing behavior is added to the data. Why?
Spotting trends in key areas of spending can be the ultimate indicator of the financial direction of the company. The company’s purchase history will reveal its priorities. And purchase priorities are the bottom line indicator of overall financial health.
Is the company contracting or hiring personnel? Contracting may signal a decline in business, while hiring may suggest growth or expansion. Is the manufacturer’s purchase of raw materials dropping significantly or sharply? What about their purchase of shipping services? Has it dropped? If the answer is ‘Yes’, there’s cause for concern.
More and more credit managers are learning that purchasing behaviors are actually more telling than payment behaviors. Conventional payment data is an important element that is greatly enhanced when purchasing behavior data is added.
What do you think? Do you consider purchase behaviors when you extend credit?