Today, just like 50 years ago, credit decisions are based mainly on the same inputs: financial statements, credit ratings and personal relations with the people who run the business.
These inputs, though important, are limited. Financial statements, if reliable at all, present historic information that is influenced by what companies want to present at the end of the quarter. For example, revenue shifts or liquidity distortions (due to stopping payments to suppliers before the financial statements) can create a picture that is different than what the company will look like one month after the end of the quarter when the statement is published. Credit ratings are not available for most companies and in many cases are not updated. The smaller the company is the more fluid its financials and the higher its dependency on the behavior of the owners and a small number of customers. With small companies, a personal relationship with the owner or the chief executive is usually required to compensate for the additional risks, which is why banks with local branches have an important advantage, if not a monopoly, on financing SMEs, for example.
Real-time financial information from our clients gives us new tools to finance companies and mitigate risks. Information about sales, collection, approved payments to suppliers, inventory and backlog, directly from the financial systems, can provide a new kind of financial statements: Dynamic Financial Statements. Such information can better tell us if a liquidity issue is a temporary one that can be fixed with cash or a downhill trend. As a result, Real-Time Information Financing can permit more financing for growth (i.e. financing new sales and dealing with the timing gap between procurement and manufacturing costs and future sales proceeds). >>> Continue Reading