SkyMinder: Newsletter Issue 6

Today, commercial credit reports are widely available both on and offline for competitive intelligence activities and credit worthiness evaluations. Most professionals using credit reports are familiar with the typical layout and content of reports regarding US companies; they know what to look for and look out for when using them. However, using non-US credit reports can be a whole different ball game.

Despite a rather shaky economy in recent years, US imports increased. This, combined with heightened fears about money laundering operations abroad and the desire to know more about foreign partners, clients and suppliers, has led to an increased need for overseas credit data.

But just how reliable are non-US credit reports? And what should competitive intelligence professionals, credit managers, or import-export officers be aware of when purchasing and analyzing them?

The aim of this article is to give readers an overview of non-US credit reports. Here I point out some of the more general issues, followed by some of the intricacies that should be kept in mind by looking carefully at a selection of countries in more detail - Italy, Austria, Germany, Switzerland and Israel.

Look at each separate country in context
The first thing to take into consideration is that ways of collecting, processing, and accessing financial information vary in every country. International standards in credit reporting would be an ideal situation, where business professionals could make cross-country comparisons with ease. When analyzing a non-US credit report, the current reality is that you must consider factors affecting the country of interest as a whole.

First of all, it may seem obvious to state that companies in volatile areas (such as those affected by war or civil unrest) should be reviewed on a regular basis - no less than once every twelve months. Keeping an eye on general country trends helps identify and evaluate risks related to political or economic change. An up-to-date, well-compiled credit report is worth its weight in gold when evaluating potential business partners or competitors.

Be aware of multiple books
Country-specific work practices must also be considered. When working with South and Central America, don't just take credit information reports at face value. "Remember that it is usual practice for South American companies to keep several sets of books," says Robert Schmitt of CRIBIS Corporation which specializes in distributing global credit and business information via SkyMinder. "The kind of information that a company makes available depends on who is asking for it. Venezuela is a case in point - one set of books tends to be compiled for creditors, another for potential clients, and yet another for the tax man. The key is always to be skeptical and carefully scrutinize credit figures."

In Colombia, for example, companies are obliged by law to deposit financial information at the local registry. In Mexico and Chile on the other hand, private companies have no such obligation and financial information should therefore be treated with caution. However, if official financial data is available on a private South American company due to an audit or investigation that has been carried out, this could signal problems in the company and their financial situation should be investigated very closely.

Payment terms and information
Payment terms are another important factor to consider. Normal payment terms vary tremendously between one country and another. In Germany, terms are usually between 10 and 30 days compared with 60 - 90 days in Spain. The longest payment terms in Western Europe are seen in Italy where contractual terms average 65 days but delays are common and actual payments average 120 days. In Egypt, payment could be made up to five months after a transaction and the debtor would still be considered a regular payer.

Payment information should be analyzed along with the country's payment terms, and also varies by country. In South Korea, for example, credit reporting simply does not include payment performance data - the majority of data collected is negative data. In the UK and Brazil, no official commercial repository exists for payment information. Consequently, UK credit reporting agencies do not tend to give credit opinions on small, privately-owned companies, even if they appear to be financially secure.

Let's look now at a selection of countries in more detail - Italy, Austria, Germany, Israel and Switzerland - and examine different practices in depositing and processing financial information and the resulting credit reports.

Austria & Germany
Today, in both Austria and Germany, all AG (publicly traded capital companies) and GmbH (limited liability corporations) companies are legally obliged to file their balance sheets at the local Companies Registry within nine months of the balance sheet date. However, professionals looking for historical financial information on German companies may encounter problems, since in the past only large-sized AG and GmbH companies had to deposit information. Penalties of up to ?3,700 can be enforced for companies who do not file financial data, or do so late.

Regulations regarding the amount of information that German and Austrian companies are obliged to file depends on company size. Small companies in both Austria and Germany only have to file a balance sheet, not profit and loss information. Medium-sized Austrian companies have to deposit the balance sheet together with an abridged version of the P&L (stating gross earnings, but not sales).

However, the criteria for company size classifications are different in Austria and Germany. For example, in Austria a company is classed as small if two of the following three criteria are not exceeded:

Total assets: ?3,125 million
Turnover in 12 months preceding the report date: ?6,250
Number of employees (average over 12 months): 50

On the other hand, in Germany a company is considered to be small if two of the following three criteria are not exceeded:

Total assets: ?3,438 million
Turnover in 12 months preceding the report date: ?6,875
Number of employees (average over 12 months): 50

"Accounting principles in Germany and Austria are pretty similar," says Rainer E. Toifl-Dupin of KSV Intl. CreditInfo, based in Vienna, Austria. "However, there are some considerable differences in the research processes. In both countries, the respective district courts run the Companies' Registry, but today Austria has online access to this information while Germany is still in the middle of IT conversion processes."

Austria is a very small country of approximately 34,000 square miles (slightly smaller than the US state of Indiana) with only about 8 million inhabitants. Consequently companies in Austria tend to be either small or medium-sized usually with the legal status often involving personal liability. "This means that people carrying out credit checks in Austria are very interested in uncovering information on personal patrimony such as real estate which is actually available online," continues Toifl-Dupin. "This is not the case in Germany where credit reports rarely contain real estate data."

Germany has recently been going through a period of economic crisis, leading to a high number of bankruptcies. It should be noted that official German bankruptcy processes are slow, expensive, and very complicated so many companies simply liquidate and shut down.

Switzerland
In Switzerland, only banks, insurance companies and quoted companies are required to make their financial information available. Swiss limited companies (SA, AG or Ltd) and companies with limited capital (GmbH) have absolutely no legal obligation to deposit their financial information.

This, of course, makes finding financial information rather tricky. "Some companies with no legal obligation to deposit data choose to do so anyway, often for public relations reasons, and release key figures to the press, such as sales related data or number of employees." comments Adrian Ashurst, director of Worldbox Business Intelligence in Switzerland. Basically, Swiss companies can decide themselves what information to make public.

So how do credit agencies in Switzerland compile a credit report? "The figures presented in our business information reports on Swiss companies are thoroughly researched," continues Ashurst. "We collect data from various sources, including court information and direct verification with the company, but it is up to them to decide how much information they wish to disclose."

It should be remembered that credit reports on subsidiaries based in Switzerland which do not disclose their financial information will usually contain the financial statements of the parent company instead.

Italy
Italy's five million businesses are all registered with the local Chamber of Commerce. Only certain types of companies are obliged to file financial data (for example joint stock companies "società per azioni" and limited liability companies "società di responsabilità limitata") which must be deposited by June each year and takes about nine months to process. The kind of information that has to be deposited is the same for all companies.

Fines can be enforced for non-compliance. "The sanctions are quite modest," states Carlo Sirtori, manager of CRIBIS.it, a leading online credit information source for Italian companies. "However, non-compliance leads to further checks and will also have a negative effect on a company's rating."

Banking information is not easy to collect in Italy since stringent privacy laws, introduced in 1997, are taken very seriously. Any banking information seen in Italian credit reports should be treated with caution.

There are many official distributors of Chambers of Commerce information in Italy so credit reports in Italy are not hard to come by, but the quality of the reports varies from service to service. "Purchasers of credit reports should be aware of three things: report currency, the total cost before purchasing, and delivery times," continues Sirtori. "A quality credit report is essential - if things go wrong, official collection processes in Italy are painstaking, taking anywhere up to five years, and the outcome is uncertain. A slow-functioning legal system doesn't deter late payments. This is why many people turn to privately run debt collection agencies."

Israel
Public limited liabilities companies and some private liabilities companies in Israel are obliged to file financial data, some annually and some on a quarterly basis. The Bank of Israel runs Israel's only public commercial repository for information on restricted bank accounts, but private credit reporting agencies have their own repositories.

Stringent sanctions are enforced when companies do not deposit their data or miss the deadline. "Companies can be fined," comments David Avney, director of Vivid Management Systems, one of Israel's private credit reporting agencies, based in Tel Aviv, Israel. "Their directors and managers may be found liable as well, fined and even sentenced to imprisonment."

Any special things to consider when studying credit reports on Israel? Analysts should be on the lookout for the usual warning signs, as with any other country, such as conduct of shareholders, reduction in workforce, delayed payments and business relations with domestic and overseas clients. "In Israel and Palestine it is also important to check out whether the company's location is in proximity to security crisis areas," states Avney.

What To Do When Information Is Lacking
Today, it is rare to not be able to find any credit data on a specific company, even in developing countries, due to the existence of locally based credit agencies which carry out fresh investigations. However, there are some ways of compiling a financial statement when nothing is available.

"One way is to analyze consumption of materials," suggests Robert Schmitt of CRIBIS Corp. "By using trade data from members of your trade group, you can study the consumption of a specific raw material, looking at the data over a relatively long period of time if possible. Compare that analysis to the volume that your firm does with like companies for which financials are available. The next step is to determine a sales price per unit for the material that you sell to the like firms and develop an income statement and balance sheet using industry norms."

Conclusion
Credit reports are widely available today for industry professionals thanks to the selection of public and private credit collection agencies operating around the world. Credit reports do vary from country to country, as I have tried to illustrate in this article, although it is impossible to detail every variation. The first piece of advice that a credit manager or competitive intelligence professional should follow when analyzing non-US credit reports would be to consider the report in the context of the country as a whole and not in terms of US norms.

The second, and perhaps the most important, is to carefully select the information provider, and only purchase reports from reliable specialist sources that guarantee high quality, updated information that is collected and compiled in a professional, responsible manner.

This article appeared in the May issue of Competitive Intelligence Magazine, entitled "NON-US credit reports: what users need to know".