“Here's the point: when there are no stable, verifiable credit benchmarks, all bets are off.” –Edward Testa, vice president of sales, Greystone Equipment Finance Corp., Burlington, MA
Time used to be in trucking – much less the broader American economy – that handshakes and honesty were the only things needed to cement a deal, be it hauling freight, selling homes, buying cars, or extending lines of credit.
If those days weren’t dead and gone already, a stake has truly been driven through their heart by our shared experiences over the last 12 months or so.
Of course, this should NOT come as a surprise to anyone. Remember the “Dot.bomb” bust at the end of the Clinton era? All the pundits waxed rhapsodic about the “new economy,” efficiency gains, and whatnot (and that included President Clinton and VEEP Gore, I might add). A lot of folks lost their savings in that mess.
Then we had the widespread corporate book-cooking scheme as the 21st century began – MCI and Enron the leading villains. Enron went so far as to destabilize California’s energy market before collapsing under its own ill-gotten weight – taking down the once proud accounting firm Arthur Anderson with it (and justly so).
Did we learn from either of those messes? Nope. Greed has a habit of clouding one’s vision it seems. So we binged on mortgage back securities and over-priced homes. And what do you know – a global recession resulted!
More importantly, though, the current tale of corporate and individual fiscal malfeasance we’re living through comes with a huge, scary footnote. The credit rating agencies and accounting firms everyone in business relied upon for decades to separate the good companies from the bad proved themselves to be charlatans of the highest order. In effect, they did a lot of Wall Street’s dirty work, because their word was golden. If they said a company was solvent, it must be true, right? Apparently, no – and we’re all left to deal with the wreckage such blind faith left behind in its wake.
“No matter how accurate a rating or a credit score seems to be or how many promises a product seems to make, there is no single silver bullet that determines creditworthiness,” explained Ben Boylan, a vice president at Coface and head of the company’s rating service in North America in a recent article in the Columbia, MD-based National Association of Credit Management’s (NACM) Business Credit in-house magazine.
“In fact, multiple well-intentioned policies and programs weighed negatively on the economy, as did widespread financial illiteracy, greed and sins of both commission and omission,” he said. “It is important to remember that many businesses and risk managers gave up on the idea of due diligence throughout the downfall – and were willing to accept certain securities and financing setups that, with a little more investigation, would’ve been promptly rejected by any reasonable financial manager.”
“It's not necessary to look very deep to figure out why this is happening,” added Edward Testa, vice president of sales, Greystone Equipment Finance Corp., Burlington, MA.
“Bankers see conditions changing so rapidly they are simply reducing their risk as close to zero as possible,” he noted. “While we may find it difficult to justify the strangling impact such policies have on business, the message is clear: In this business environment, there are not enough reliable ways to gauge when disaster will strike.”
But Testa stressed, however, that recognizing the lack of truth-telling in business out there doesn’t mean the capitalist system is irretrievably broke – far from it, actually. What it means is that companies large and small need to harness a positive, upbeat attitude to new, more rigorous forms of due diligence to see their way through what others shy away from. "Hard work conquers all; there are no barriers, just opportunities,” he noted.
“As the foundation of our economic system, this attitude attacks problems and solves them,” said Testa. “As entrepreneur Will Pike says in William Martin's historical novel, The Lost Constitution, ‘We might be dreamers, but we have to be doers, too. So we get up in the morning, we go to work, and we solve our problems.’ And the problem we need to solve now is figuring out how to be neither too conservative nor too aggressive when it comes to credit.”
Since all bets are off, in Testa’s view, there is one primary, essential guideline for avoiding trouble, one strategy to keep us from alienating customers on the one hand and finding ourselves faced with high receivables and uncollectible accounts on the other. The solution is both simple and demanding: stay closer than ever to every customer. Testa believes there’s a step-by-step process for doing this:
* Never assume you know what's happening in the customer's business and never think you know enough.
* Never assume that what the owner or manager tells you is accurate. They aren't liars; they are optimists and want to put on a good face when it comes to business.
* Check credit reports frequently, but don't assume that a "good" report is an accurate measure of financial health.
* If you're not satisfied with your level of knowledge, make discreet inquiries. Who do you know that knows the customer?
* Make a point of visiting customers regularly and keep your eyes and ears open while you're there. Talk to employees and ask them how it's going.
* If you depend on salespeople or reps to obtain information, spell out exactly what you want them to look for, including making regular (define this) visits to the business and what they should look for. Indicate that you expect written reports. This also places responsibility on them to see clients more often and to strengthen relationships.
“Managing credit issues today is a serious intelligence-gathering function,” said Testa. “Even small pieces of information are part of the overall picture and you need to obtain everything you can so you can act before a serious problem arises.”
Besides avoiding financial trouble, there's another enormous upside to staying very close to the customer., he stressed: “It can lead to more business, for – with the accumulated information – you're better prepared to meet their expectations.”
Not a bad way to approach business in this tough economic climate, if you ask me.