Managing Cross-border Credit to Improve Liquidity

One of the key responsibilities of corporate treasurers is to improve and maintain liquidity in the business. Now that lending by financial institutions is tighter than ever before, trade credit management has become an important weapon in the treasurer’s armoury when addressing the liquidity issue. In today’s globalised business environment, trade credit management involves customers and suppliers across multiple countries, not just the domestic marketplace. Yet while billions of pounds worth of cross-border credit deals are made every day, decisions about who to do business with are often based on inadequate information. As a result, organisations can be at huge risk from bad debts, pressure on cashflow and damage to their own credit score.

The majority of credit reference agencies (CRAs) have now recognised the need to provide information not just about the background of a company based in a single country, but also its relationships with sister, daughter or mother companies overseas. According to our data, a quarter of all UK companies that sit within a group structure will have a foreign enterprise somewhere within that wider group. With that level of potential integration and the current levels of uncertainty in the eurozone then properly understanding risk exposure can no longer be seen as a purely ‘domestic’ concern.

So What Should You Be Looking For and Where?

The availability of increasingly full and online business credit reports means that they are no longer just tools for the exclusive use of credit controllers and their teams. This ‘democratisation’ of credit information allows corporate treasurers to explore information about current and potential customers and suppliers to gain a fuller picture of their current and future status, as well as assessing their creditworthiness and more completely understanding their potential impact on overall corporate cash management.

It is in the interest of corporate treasurers and their teams, including credit controllers, to make sure they carry out a full set of investigations in order to see as complete a picture as possible on the parent company and any subsidiaries, as their financial wellbeing will have an impact on the creditworthiness of the original customer or supplier.

A credit score calculated by a CRA will typically take account of an organisation’s filed company accounts, county court judgements (CCJs) awarded, the background of a company’s directors, how long a company has been in business, along with many other wider economic and industry factors.

Armed with this information, treasurers can become much better informed about the parties they are dealing with. They can calculate the risk associated with a particular company and work with the rest of the finance team to take appropriate action to reduce risk, such as setting limits for credit available to individual businesses.

Taking Account of International Variations

Increasingly, CRAs are expanding the amount of information that they include within their business credit reports and face a further layer of complexity when one factors in multiple geographies. Different markets may have completely different legislative frameworks requiring very different solutions.

Collecting data from around Europe in the credit referencing marketplace is a fairly standardised process with a reliance on official sources for the bulk of intelligence. However, the quality of official data and access to it can vary from region-to-region.

Attitudes towards accounting vary from one European country to another. Historically, for example, Germany had relatively poor accounting practices. Until new legislation was introduced in 2008, private companies who failed to comply with filing requirements were rarely punished. Apart from larger, publicly quoted companies, few organisations actually bothered to file accounts. The Netherlands, on the other hand, have always been diligent about accountancy processes. Best practice dictates that accounts are submitted at the designated intervals and rarely have to be enforced.

In some cases, there have been attempts by governments to improve the quality of information available on companies, but there has always been an element of a trade-off against the perceived ‘burden’ this will place on the companies who are filing. Driven by initiatives from the European Commission (EC), countries such as Germany and Spain have already introduced Extensible Business Reporting Language (XBRL) – a protocol used for submitting company accounts digitally. In theory, this should improve the quality, depth and timeliness of information available to the CRAs. However, in practice the data quality can be poor, as there is no incentive for companies to complete the information comprehensively and accurately.

Furthermore, not all regulatory changes are aimed at improving transparency. For example, the EU has proposed legislation to change reporting requirements for small to medium-sized enterprises (SMEs). Under the law, any company with annual revenues under €1m will not have to file their accounts. In effect, this means that 95% of companies won’t have to file their accounts, which would create a massive gap in the data available.

Here in the UK the Department of Business Innovation and Skills (BIS) followed this up with a discussion paper in August 2011 called ‘Simpler Reporting for the Smallest Businesses’, which outlines suggested ways to amend the current regime for micro-enterprises’ financial reporting.

While the intention of such proposals, which is to cut red tape and free up time for owner/operators to focus on running their business is laudable, they threaten to reduce accountability and has the potential to lead to a greatly reduced availability of credit, both in terms of bank lending and trade credit as organisations are faced with less information being available – a situation that could ultimately lead to increased levels of business failure.

There are also cultural differences which affect how businesses are run country-to-country. For a statistically based model to be effective in each territory, it is necessary for these to be accounted for in the system.

For example, in the UK the insolvency data shows that companies that file their accounts at the last possible opportunity are eight times more likely to fail than those that file earlier. However, this is not the case across other European countries where late filing of results is a business norm, rather than an indicator that a company may be in trouble.

While the type of information collected from country -to-country has to remain as standardised as possible, each territory also has its own unique data sets. For example, in the UK there are CCJs, while Belgium has protested bills, as a result CRAs have to build models which take these differences into account but still allow meaningful cross-border and inter-group analysis.

Making the Links

In order to reduce the risks of doing business internationally as far as possible it is also important to understand the importance of ‘linkages’ between companies across borders. Creditsafe has recently improved the transparency in this area by ‘joining up’ its databases to allow users to automatically explore every organisation in a group to check whether there are secondary links to companies not previously seen.

The companies ‘revealed’ through these links don’t have to be parent or sister companies within a traditional group structure; they could just as feasibly be seen via a subsidiary firm. For example, a company in the UK may have a subsidiary that is also part-owned by an Irish company, which would never be seen in a traditional structure but can now be seen as a ‘linked’ company, and the status and standing of this Irish firm may give further insight into the future of the original UK company.

This sort of investigation is important simply because some company ownership structures are so complex, due to the organic way in which they have grown. For example, a high proportion of companies in the UK use several holding or shell companies for reasons such as tax mitigation or asset protection, which can make tracking parent companies and subsidiaries to establish risk and liabilities extremely complicated.

This is not to say that companies are deliberately trying to manipulate their core company’s credit score. However, a leading UK brand with a strong asset base, revenues and cash flow may have European connections that are under-performing and operate as an entirely different brand – potentially dragging the group’s performance down to a position where the long-term viability of the enterprise is questionable.


Managing cross-border credit effectively across the extended financial supply chain depends on having access to the most up-to-date, wide-ranging and accurate information possible about potential customers and suppliers. It is part of the corporate treasurer’s responsibility to ensure that credit controllers and other key managers understand the breadth of information that is now available about companies and their wider groups: research ahead of time reduces risks associated with non-payment and helps to build a strong credit management policy.


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