What to Say When Applicants Don't Meet Your Credit Standards
Giving in and saying yes is very often much easier than saying no. This holds true whether you are dealing with your spouse, your kids, a salesman or a customer. Not surprisingly, refusing to offer customers the credit terms they hoped for can be one of the more difficult tasks credit pros must perform. Doing it right requires some forethought, but by knowing the ins and outs of the process you can confidently accomplish your task without raising additional problems.
The Regulatory Environment
Businesses have wide latitude in not approving credit to other commercial enterprises. According to the legal experts we consulted, the primary (and maybe the only) non-acceptable reason for denying credit involves discrimination. For example, refusing to sell to minority businesses or practicing geographic redlining, where you refuse to grant credit, or only grant credit on less favorable terms, to anybody within a geographically defined depressed area, could place your firm at risk of a discrimination suit under the Equal Credit Opportunity Act (ECOA).
Keep in mind as well that there is a distinction between refusing to sell and refusing to grant credit. You can always offer cash terms to any prospective customer that does not meet your standards of creditworthiness.
In that instance, there is no refusal to sell and, hence, no discrimination. If, however, an applicant's race, religion, sex, marital status, age, color, or national origin in any way tempers the credit terms you offer, discrimination could be inferred.
Need You Comply?
The ECOA also addresses the issue of notifying applicants that credit has been denied. However, there is some debate among legal experts as to whether these regulations apply to B2B transactions. In addition, legal sources contacted by Credit Today were unaware of any enforcement by the Federal Trade Commission (FTC) of the notification requirement involving commercial credit transactions.
However, with the explosion in the number of small proprietorships, the lines between B2B and B2C transactions are sometimes blurred. In addition, transactions that involve a guaranty from a spouse, or otherwise draw a consumer into the deal, are clearly subject to the ECOA regulations. This being the case, complying with the regulations in question, which are not onerous, is prudent.
Regulation B ('202.9) of the ECOA requires that you notify applicants orally or in writing of adverse action taken on credit applications. If you deny credit, and if, within 60 days, the applicant requests an explanation , you then have 30 days to advise the applicant of the reasons for your decision. Therefore, routinely sending written notice to applicants when you make an adverse credit decision can provide both a comprehensive and efficient solution.
Communicating With Applicants
How you communicate with applicants that are not getting what they want is where it gets tricky. "Unfortunately, I do not think there is ever a win in trying to explain to a customer with poor credit why you will not extend credit," says Bruce Diamond, director of credit at Alco Industries. "The explanation leads to a dialog that just goes in circles, and from my experience, usually ends with no better result than if you stick with your mantra. Mine is: According to the credit information that is available, you do not currently qualify for an open line of credit.?
By keeping your explanation very straightforward and to the point, you reduce the chance of getting into a deteriorating debate with the applicant. Diamond adds, "When the prospective customer responds that he gets credit from others, I reply that everyone has their own standards and that unfortunately they do not meet ours. Then I stop talking and try to say goodbye."
Even though the applicant may not qualify for your standard credit terms, there are usually other alternatives. "We don't deny credit, we propose terms," explains Duane Wardle, senior vice president and treasurer of Young Electric Sign Company. "People don't like to hear you deny their credit. It's better to tell them what you will do. It's an approach that works for us," he says. By seeking security, a guaranty, a letter of credit, or even reverting to cash on the barrelhead, you can save the sale without seriously damaging the customer relationship.
Denial Sometimes Gives Leverage for More Info
Sometimes applicants will be willing to give you more details if they fail to get the desired terms on the first pass. For example, full financial disclosure can make a difference when the preliminary decision has been based on minimal information. You also need to keep in mind that customer situations change. "My staff knows that is part of their job to find a way to make the deal happen," says Dave Uranga, director of financial services at BellMicro Products. "We always offer to take another look in three months or longer if the customer desires."
Typical Reasons for Denying Credit
- No credit application submitted
- Application/credit agreement not signed
- No financial statements submitted
- Losses or low profits
- Poor cash flow
- Excessive debt
- Refusal to pledge collateral
- Refusal to sign a guarantee
- Tax liens
- Judgments
- Unfavorable UCC filings
- Refusal to provide a letter of credit
- Payments beyond terms
- Non-payment of invoices
- History of NSF checks
Maintaining Confidentiality
When applicants find out they are being denied credit, they typically want to know the basis of your decision. You should never reveal any sources of information, derogatory or otherwise, to your customers. This is because, in all likelihood, that information was obtained on a confidential basis.
Once you start revealing specific sources, you open up a can of worms that the applicant can use to try to bring sales or upper management into a debate about your rationale and thereby waste valuable time for all involved. "If they ask where the information was obtained, I tell them credit reports and credit references. That usually takes care of it," remarks Leslie Nelson, credit manager at Northwave North America.
"They are supposed to be grown, intelligent people," notes Susan Batten, credit supervisor at Metalworking Products, "and if they stopped and thought about it, they could figure most of it out. After all, they gave you the information on their credit application."
Still, there are some situations that call for a discussion with the applicant. "If I have their financials and they are the driving force for the decision, I will discuss the financials. But, I never discuss references or industry trade reports," emphasizes Uranga.
While you need to protect the confidentiality of your outside sources of information, by discussing an applicants own operating details, an experienced credit pro can provide customers with valuable insights that have the potential to benefit both parties in an ongoing relationship.
Furthermore, in order to comply with fair credit and anti-trust legislation, all credit information should be kept strictly confidential. For example, don't allow sales to review credit references, as they contain volume and terms-of-sale information. Access to this information should be limited to credit department personnel and specified C-level executives such as the controller, CFO and CEO.
Behind the Protests
Being the bearer of bad news is not something to look forward to. However, having your facts together and knowing the pitfalls you might face will help you control the conversation. Even so, you will certainly face protests. The nature and the intensity of those protests can reveal a lot about the applicant. "My experience tells me that he who complains or demands the most is usually the worst credit risk," states Uranga. "I, too, find that the ones that 'squawk' the loudest are usually the ones that have the most to hide," adds Batten. So don't be fazed by the response you get. It's probably just confirming that you made the right decision.
