Module 1: In-House Collec�on Strategy

Lesson 7: Skip Tracing (Credit Inves�ga�on)

In recent years, there have been diversified, live, and large-scale developments in the credit
industry. As the first line of defense for pre-loan risk control, credit investigations and
approvals are highly valued by banks and financial institutions, which are put in a very
important position. Due to the fraud application and credit risk come into being in various
ways, which seriously threaten the asset security of banks and financial institutions. Along with
the investigation and approval pressure brought by the huge business application volume,
higher requirements are put forward for the fraud risk identification ability of credit
investigation and approval and the ability of automatic investigation and approval.

To adapt to the market changes and meet the market demands, Chinasoft International has
designed and implemented a streamlined credit investigation and approval platform based on
advanced workflow products, decision-making engine products, and electronic image
technology, to realize the factory and paperless operation of the approval work, improve the
quality and efficiency of the operation and management of the organization, and the risk
management system; and to enhance the overall competitiveness and reduce the risk
management cost, improve decision-making level and efficiency, strengthen management risk
prevention to pursue the goal of maximizing benefits.

Credit Investigation

We start with a simple Internet search for the most basic of information: names, addresses, and
phone numbers for the company in question.

Once that information is gathered, we contact the Secretary of State. This is how we learn if
the company is a sole proprietorship, a partnership, or a corporation.

That’s important to know because, with a sole proprietorship, the individual is liable. If it’s a
corporation, only the corporation is liable unless you have a personal guarantee. Don’t forget to
comb through the Credit App from the client. It offers useful information like banks, vendors,
landlords, and phone numbers.

In the course of our investigation, we set out to learn the following 5 things about the
company:

1. Names of officers and directors

Cut to the chase and find the decision maker. That’s usually an officer.

2. Name of the registered agent Every

company has one. He or she is responsible for the legal documents.
3. All known addresses
The branch headquarters location is the main address we want.

4. Present status
Are they active or dissolved? If active, the individual has the corporate veil of protection. If the
debt was incurred after dissolution, it becomes a sole proprietorship and therefore, collectible
from the individual.

5. Date of incorporation
If the debt was incurred before the date of incorporation, it becomes a sole proprietorship and
therefore collectible from the individual

There are many databases that collectors use to gather information.

Free online sources are a great place to start, like Blackbook, Manta, Corporation Wiki,
NetOnline, and of course, yellow and white pages.

Paid services like Accurint, Hoovers, CBC Innovis, Master Files, and First Data’s FastData offer
more detail.

When we pull a report from a database, we collect every phone number ever used, names of
relatives and neighbors, associates, and social networks. Armed with the above information, we
can save time by locating the person/s responsible, right from the very beginning bringing a
timelier resolution.

Legal and Ethical Aspects of Credit Investigation

Exchange of Credit Information – The Legal Perspective

The exchange of credit experience information on a particular customer is legal only if the
information exchanged is restricted to factual, historical data.
Since 1925, various U.S. courts have recognized in numerous decisions the legitimate business
interest in the exchange of factual credit information among businesses with legitimate
interests. One important case supporting the right to gather business and trade credit
information is the 1925 U.S. Supreme Court case that held:

“... The gathering and dissemination of information which will enable sellers to prevent a
perpetration of fraud upon them, which information they are free to act upon or not as they
choose, cannot be held to be an unlawful restraint upon commerce, even though, in the
ordinary course of business, most sellers would act upon the information ...” (Cement
Manufacturers Protective Association vs. United States, 268 US 588, 603–604)
In a 1976 case, the U.S. Court of Appeals for New York commented on the exchange of credit
information as follows:

“... Unlike exchanges regarding prices which usually serve no purpose other than to suppress
competition, and hence fall within the ban of the Sherman Act ... the dissemination of
information concerning the creditworthiness of customers aids sellers in gaining information
necessary to protect themselves against fraudulent or insolvent customers. ... Given the
legitimate function of such data, it is not a violation of the Sherman Act to exchange such
information, provided that any action taken in reliance upon it is the result of each firm’s
independent judgment, and not of agreement.” (Michelman vs. Clark Schwebel Fibre Glass
Corp., 534 F2d 1036)

These cases are the foundation for conducting all business and trade credit investigations and
exchanging business credit information on specific customers among competitors.

These cases, however, do not permit the exchange of credit information or allow for gathering
of credit data on consumers who obtain credit for “personal, family or household use.” While
commercial (business and/or trade) credit is specifically set up to avoid “personal, family or
household use,” there may be cases where under the law special consideration is needed. Every
business to-business credit grantor should recognize the respect the law itself discerns for
business credit grantors and should adhere to those legal and regulatory parameters as well as
to the ethical standards observed in the realm of business credit.

1. Antitrust in Credit Investigation

The antitrust concerns a credit grantor must consider when inquiring or disseminating
information about a customer’s credit history, payment pattern, etc. In the context of
information exchanged among commercial/business credit grantors, the primary objective
is to avoid violating various antitrust laws. The intent of these antitrust regulations is to
avoid any behavior that could lead to conspiracy, restraint of trade, price setting or fixing, or
boycotting certain customers or suppliers. At the same time, the regulations also attempt to
allow for the free-flow of credit information in a very specific manner so that creditors and
competitors can avoid fraud, including the non-payment of an outstanding debt. U.S.
antitrust laws are designed to give creditors the right to ask and find out how a customer or
potential customer meets its obligations. The credit grantors who exchange such
information must do so in a manner consistent with these laws.

The credit grantor must limit comments to the history of the customer’s account. How long
has the subject of the inquiry been a customer? What has been the highest amount of
credit given/allowed? What were the credit terms offered to the customer? Does the
customer owe money now? How much of what the customer owes is current? How long is
the account past due 30 days, 60 days, 90 days, or longer? How did/does the customer
 usually pay the account? What has been the experience with this customer regarding credit
dealings and transactions?

No credit grantor may suggest that credit be either extended or denied or offered in such a
way as to create or appear to create, any form of agreement to sell or not sell a customer in
any way other than by each creditor’s independent decision. To do so could be considered a
conspiracy in restraint of trade, which is a potential violation of the Sherman Act.
Comments such as “I wouldn’t sell (customer) on credit if I were you,” “If we (all) sell
(customer) on COD terms,” or “Maybe we should” could indicate a threat of antitrust
violation.

A credit grantor cannot enter into discussions of any nature about prices. For the credit
department, this relates to the terms and conditions of sale or credit. Under the Robinson-
Patman Act, sales term, a common vernacular that is often used interchangeably with credit
terms, is an element of price. In some instances, a credit grantor will not release
information regarding terms of sale when asked to avoid any concern about the question of
price as it relates to the Act. Robinson-Patman does permit the inclusion of this information
as it relates to the credit information trade line; however, if a company sets its policy to
prohibit sharing this information, then a customer’s payment history about sales/credit
terms will likely not be available.

Credit grantors may not agree to do business with certain customers according to certain
terms or conditions (i.e., conspiracy in restraint of trade). Nor may they report something
that has not yet occurred or been acted upon such as: “We will never sell this customer on
open account terms again”; “This customer is permanent COD”; “We are going to file suit”;
“We are filing liens today.” These comments are stated in such a way as to indicate that the
actions themselves have not yet occurred. This means that the customer still has time to
redeem itself and prevent these intended actions from taking place. When comments like
these are shared, the recipient of the information tends to factor them into its credit
decision. If the provider of the future action comment does not act on the comment
because the customer subsequently pays or makes arrangements to pay, or management
determines not to take action, then the customer may have been harmed and an antitrust
violation will have occurred.

Each credit grantor must use the information obtained as a basis to make independent,
unilateral credit decisions by their own company credit policy and/or judgment without
influence, suggestion or coercion to make a credit decision in any manner.

2. Conspiracy, Restraint of Trade, Joint Actions

While the courts have held the exchange of factual credit information to be legal and
proper, any agreement, express or implied, between competitors on any action concerning
 a common customer or class of customers is clearly illegal. Such an illegal agreement or
conspiracy could be an agreement not to do business with a certain customer or class of
customers or it could be an agreement on terms to be offered to a customer or class of
customers. While exchange of factual information about the credit experience with
customers is perfectly proper, care should be taken that no agreements are made for any
common action, nor should there be any effort made to influence the credit decision of
another company. Any joint action can have the effect of eliminating the element of
competition from the marketplace; to do so is unlawful.

3. Defamation in Credit Investigation

People operate businesses. As such, it is common to discuss a business credit transaction
with the owners, partners or principals of the business credit customer. This is the issue
referred to in Figure 11-2. Even though the customer is the business entity itself, the
principal of the entity is looked to for management decisions such as payment of invoices. It
is impractical to consider the business without considering the management of the
business. Whoever makes management decisions, that person’s track record, previous
business experience and knowledge have an impact on current and future business credit
decisions.
Credit grantors who are party to any such objectionable or disparaging remark or writing
about the character or personal conduct of an owner or principal of a common customer
can be sued by that customer. Defending the remark or writing is solely the legal burden of
the parties involved in making the writing or remark. The only legal defense to the claim is
“fact” or “truth.” The injurious claim made by a customer is called defamation.

4. Libel and Slander

Defamation is a false statement made to others that injures the name or reputation of a
third party. The two types of defamation are libel and slander. Libel is defamation in some
permanent form, such as printed media or writing in any form, including electronically-
generated emails, computer files, folders or documentation. Slander is defamation in a
temporary form, such as speech.
The law has always been very protective of the reputation of businesses and business
individuals. Legislatures and the courts have recognized that a person or business firm may
suffer real damages by being lowered in the esteem of any substantial and respectable
group, especially when that group may represent suppliers.

Examples of Libel and Slander

While it is proper to pass on information that is of public record to another supplier, such as
the filing of liens, legal actions or criminal convictions, such information should not be
reported with any malicious intent. For instance, continuous reference to a person’s or
company’s unfavorable past history could hinder that person or company with such a
record from being reestablished in society. This is especially pertinent where many years of
 good conduct have ensued or where nothing either good or bad is definitely known about
the intervening years.

It is not defamatory to say that a customer is past due, has broken payment commitments,
has bounced a check, is cautious with money, or has led an eventful life. These statements
lack the element of personal disgrace necessary for defamation in the eyes of the law.
However, saying that a business “refuses to pay its bills” or that a firm is “insolvent” (unless
it is a fact) damages that entity in the business community and may result in a charge of
defamation.

Matter of Libelous Per Se

Generally, matter libelous per se is any communication that falsely suggests a criminal act
or immorality, or which tends to deprive a person in business of public confidence and
esteem. Examples would be to accuse someone of fraud or of being dishonest. The charge
need not be made in a direct, positive, and open manner. If the words used, taken in their
ordinarily accepted sense, convey a degrading imputation—no matter how indirectly—they
are libelous. A written communication that states a particular debtor has not paid debts
that are owed and is past due is not libelous, if true. If written communication imputes
insolvency, bankruptcy, or lack of credit based on this fact, it becomes libelous

The following are examples of libelous per se:

1. To charge by letter that a person knowingly made false representation with intent to
deceive, or lacks veracity.
2. To publish a false statement imputing insolvency to a merchant or trader.
3. To charge falsely that a person has failed in business or has made an assignment for the
benefit of creditors.
4. To falsely claim that the person committed a crime of moral turpitude (conduct that is
considered contrary to community standards of justice, honesty or good morals).
5. To charge in writing that a business individual is embarrassed, inferring insolvency or
lack of creditworthiness.
The best way to explain this aspect of an�-defama�on is to say: if it hasn’t happened yet, then
it should not be reported. If a statement is made that a customer has filed bankruptcy, the
creditor commen�ng should have the case number, date of the filing or other informa�on
evidencing the fact of the bankruptcy. Therefore, there should be no specula�on or further
discussion about a customer filing bankruptcy unless newspaper ar�cles, the public record, or
other writen documents are published for all to know. Comments based on specula�on from
salespeople, management, other creditors, the trade or others do not cons�tute evidence that
can be cited as support of the fact that the ac�on has been taken or that the comments are
based on public knowledge.
The element of publica�on, communica�on of the libel to some third person, is essen�al to an
ac�on in libel. Communica�on to the defamed person alone is not ac�onable because no third
person has learned of the defamatory mater; consequently, there is no possible injury to the
defamed party’s reputa�on.

5. Defenses to Charge of Libel

Truth is a complete defense to an action in libel and must be so pleaded. Where several
statements are published, however, of which only some are true, the defamer does not
escape liability. Some defamatory statements are not actionable as libel because they are
privileged communications: statements made by one person in pursuance of a duty to
another person having a corresponding duty or interest. Such privilege is conditional,
however, in that a community of interest must exist and must be exercised in good faith;
malicious intent or a wanton and reckless disregard of the defamed person’s rights will
destroy the privilege. A person bringing suit must prove the existence of malice to sustain
the action.

The courts have considered the following as privileged communications:

1. Statements made by a former employer whose name has been given as a reference to a
prospective employer of an employee.
2. Communications between creditors of the same debtor about their respective claims.
3. Communications by banks, such as a statement as to the financial standing of a person
offered as a surety.

Exchange of Credit Information-The Ethical Perspective

There are two cardinal principles in the exchange of credit information: confidentiality and
accuracy of inquiries and replies. Confidentiality includes the identity of inquirers and sources,
which cannot be disclosed without their permission. Adherence to these and other principles
embodied in this age-tested code is essential as offenders jeopardize their privilege to
participate further in the exchange of credit information.

Confidential Nature of Credit Information

Confidentiality relies upon the fidelity, or trustworthiness, of the party with whom information
is being exchanged. All parties involved trust that the information has been requested for a
legitimate purpose and will not be used indiscriminately.
When conducting a credit investigation, the identity of the inquirer should not be divulged
without its authorization. Similarly, the identity of the source of the information should not be
made known without its authorization.

The facts presented must be accurate because the reference is one of the most pertinent
sources of credit information. When discussing data, favorable or unfavorable, the responding
party must give a reply that is restricted to or based on fact. If a discrepancy is discovered
within a reasonable time after an inquiry has been answered and is considered to be significant
about the purpose of the inquiry, it is prudent and ethical that the discrepancy be disclosed to
the inquirer. It is expected that, as a matter of professional courtesy, no liability will be
attached to, or result from, the good faith exchange of information.

The law protects the free interchange of credit information among business credit grantors.
Without these laws, the flow of information could not survive. However, it is important that
information either provided or being provided can be trusted. In this respect, confidentiality
can be viewed in two ways. Each creditor party to any credit information exchange must have
confidence that the information exchanged is accurate and without personal or emotional
overtones. There is also the expectation that the party receiving the credit information will
conduct itself in such a way as to protect the provider and/or the recipient of the information
from any undue harm, injury, embarrassment or other unnecessary complication as a result of
either providing information requested or obtaining information from a willing provider.

The credit grantor must trust that information:

• Being provided by a responding credit grantor’s request is accurate and factual.

• Provided by the credit grantor to the inquiring party will be used solely by that
individual to make a credit decision.
• Received will not be used for any purpose other than to make a credit decision and it
will not be repeated to any other party including the business customer on which the
inquiry is made.

Ethical principles are violated when one creditor either purposefully or inadvertently violates
the confidence of another credit grantor who provided credit informa�on about a customer. In
rare cases, compe�tors have been known to use accurate but adverse credit informa�on to
undermine a customer/seller rela�onship to gain a compe��ve edge. A creditor who
inten�onally provides false informa�on may violate certain laws

Can the party receiving the informa�on be trusted to know how to handle it a�er the fact to
avoid a “breach of confidence” from occurring? Consider the following scenario:
 You provide factual credit informa�on about a customer to another credit grantor to
whom the customer gave your name (company) as a credit reference. You provide
factual, accurate credit informa�on about the customer: the customer has a specific
history of late payment with your company. Later, the customer contacts you and takes
issue with the nega�ve or derogatory reference about their company’s credit experience
with your company.

In the scenario above, a breach of confidence has most likely occurred. In other words, the
credit details you provided in confidence were repeated to the customer, or yet another party,
by a credit grantor
This breach may set up a lengthy customer service and sa�sfac�on process between
your company and the customer that can involve the sales and management teams and
even go so far as to involve legal counsel for one or both par�es and possibly beyond,
depending on the extent of the complaint.

This is only one of several types of ethical issues that can occur if a credit grantor is not
familiar with the inquiring party and does not know if the party will treat the
informa�on confiden�ally
When a breach of confidence occurs, there is likely no legal recourse available; the credit
management profession more or less polices itself by limi�ng credit informa�on to other
credit grantors whom they know and can trust. If a breach occurs, the credit grantor who
has been affected may put restric�ve condi�ons in place, such as withholding credit
informa�on from the party who has failed to treat the confiden�al informa�on properly.
In other words, credit informa�on “dries up.”
The process of exchanging informa�on among creditors in confidence is strictly
voluntary. It is important to know and recognize the ethical principles involved in such
exchanges—whether between two par�es exchanging credit informa�on—or among
several credit grantors who par�cipate in specialized industry credit groups. Open email
credit informa�on exchanges are not recommended.

Summing Up Ethical Considera�ons

The purpose of a credit inves�ga�on should be to obtain informa�on to make a specific decision
about gran�ng credit to a company. The goal of the inves�ga�on is to obtain factual and
accurate informa�on that will lead to an appropriate credit decision.
Personal Behavior. The credit professional has an obliga�on to their employer and to the credit
community in general to behave professionally and to guard against viola�ng, even
uninten�onally, any laws against restraint of trade.
Honesty. The credit professional should always present their company’s experience honestly to
any party reques�ng credit informa�on. Misrepresen�ng oneself or one’s company can have
serious legal and ethical consequences
Objec�vity. The informa�on requested must be factual. It is important to phrase ques�ons and
requests objec�vely to foster clear communica�on and avoid relying on someone else’s opinion.
Topics to Avoid. Credit professionals should avoid discussing the following topics with anyone
outside the credit department of their own company: future prices, future terms or future
discounts. Furthermore, credit professionals should avoid any conversa�ons touching on
discriminatory trade prac�ces or anything that might be construed as a restraint of trade or in
viola�on of an�trust legisla�on. For example, it is inappropriate to agree with other companies
not to sell supplies to another business. That is forming an illegal boycot and viola�ng one or
more of the federal an�trust laws.

Direct Investigation

Direct investigation occurs when the creditor collects credit information either through direct
contact with the customer or through direct contact with noncommercial sources of
information such as competitors, banks and other trade references that may have relevant
details to share. Sources of direct investigation include customer-supplied trade references,
bank references and financial statements; information obtained from a Secretary of State’s
office; information found in public records; details collected through personal or telephone
interviews with principals; and material found in search engines such as Google, Yahoo and
others, as well as the customer’s, or potential customer’s, website

Direct investigations were once the norm, but given the incredible amount of information
online today, their frequency and value has diminished. However, they are still useful when
information is not readily available or if the investigating company does not use commercial
information services. Direct investigations can also be used to verify information obtained on a
credit report or other online source, especially when a current or potential customer is high
risk, a new business or has a high exposure.

Direct investigations can be labor intensive and should be conducted with a certain knowledge
and understanding of the process. For instance, specific questions other than those relating to
facts and completed transaction experience are inadvisable. Also, inquiring a competitor
without disclosing that the subject is a prospect is unethical, and when this information is
properly disclosed, the reply is at the discretion of the account holder (respondent)
Customer Visits
The benefits of customer visits by credit department representatives include:

• Developing and enhancing the customer relationship.

• Strengthening the relationship with the sales department.
• Observing customer facilities (the inventory, condition of the equipment, the plant, the
location and attractiveness of retail operations, etc.).
• Discussing financial information in more depth.
• Reviewing financial information that might otherwise be unavailable.
• Observing how other suppliers’ products are being used.
• Developing connections between various internal company functions and the
customer’s counterparts (i.e., logistics departments, advertising departments, etc.).
• Resolving disputes.
• Sharing best practices.
• Discussing account status and collection of payments.

Building Customer Relations

Customer visits provide many valuable opportunities to build customer relationships. Visits may
include representatives from credit, sales and other members of company management. Joint
customer visits may have an additional benefit of enhancing internal communications among
sales, credit and other departments instrumental to the maintenance of the account. A
customer visit delivers a strong and unified message to the customer that its business is
important to the creditor and that the protocol for doing business with the credit grantor has
certain expectations. A good customer visit should be educational about the expectations of
both the creditor and the customer.

Company representatives need to review key discussion points before the visit so that
management, credit, sales, production, distribution and other departments clearly understand
the goals and objectives of the customer meeting. Based on these pre-visit discussions, a clear
vision of the outcome of the visit will be ensured.
Figure 11-4 suggests possible questions to ask a customer during a visit. Not all questions will
apply to every customer or every visit. The credit professional must analyze the customer’s
situation and prepare to ask pertinent questions.

Figure 11-4 Questions to Ask Customers

1. What is their corporate structure?: Is it a corporation,
partnership, LLC, LLP or proprietorship?
2. Do they have affiliated companies? If so, what is their
relationship to the company being investigated (vertical:
supplier or end-user; horizontal: differentiated by product type
or geography, etc.)?
3. What is their product cycle, from ordering to shipment of
raw materials to finished product to receipt of cash? What is
the impact of seasonality on their business?
4. What are their inventory policies? Are there markdown
procedures in place, or other plans to relieve slow-moving
stock? What is the size of order backlogs?
5. Who are the principal customers of the company being
investigated? How would their creditworthiness be described?
6. What terms of sale do they offer to their customers? What
is the payment performance of their customers?
7. What is their market share? What is their product niche?
Who is their competition, their advantages or disadvantages
(price/quality/delivery), and their relative market shares?
8. Are there plans for expansion, new product developments
or curtailments of unsuccessful lines? How will any expansion
be financed? How will overhead be eliminated or absorbed if
unsuccessful lines are curtailed? Are the facilities owned or
leased? If leased, what are the expense implications if facilities
are closed? Are the plans realistic?
9. Who are their major suppliers? What terms do they offer?
Do any of them hold letters of credit, guarantees or security
instruments such as liens?
10. What are projections for sales and income? What factors
would influence possible variances?
 11. What are their borrowing arrangements (availability,
advance rates, factoring arrangements, security held,
mandatory cleanup periods)?
• What is the impact of seasonality?
• Is refinancing under consideration?
• Are personal assets or assets of affiliated companies
pledged?

Observe the Facilities

A great deal can be learned from viewing the customer’s operations first-hand. An observant
credit professional can note irregularities and inconsistencies with information that has been
previously provided by the customer. For example, a recent financial statement may indicate a
large volume of inventory on hand. If the inventory seems low during a facilities tour, the credit
professional can point out the discrepancy and allow the customer to explain. Customer visits
break down barriers to understanding the customer. Plan to visit the most important sites first,
but not necessarily the ones the customer seems most inclined to have you visit. Credit
professionals can observe an operation and the subject company’s performance relative to
similar businesses that have been visited.

• What is the condition of inventory?

• What is the appearance of the equipment?
• Is retail traffic light or heavy?
• Are stores well located?
• Are the office facilities too extravagant or in need of
modernization?
• Are a competitor’s products in use and in what quantities?

When visiting a customer’s facilities:

• Observe the impact of competition in terms of product use, amount on hand, etc. Try to
ensure that you are not misled by what you observe. If there is a large backlog, what factors are
involved (heavy buying in advance of season, poor acceptance of the suppliers’ product, spot
buying due to advantageous pricing, purchase of supplier’s product due to credit problem,
etc.)?
• Observe what other suppliers are present in the on-hand inventory. This may provide
reference information that can be used for follow-up after the visit.
• Observe the efficiency of customer logistics. Is the facility located advantageously to customer
locations and supply routes?
• Observe the traffic flow of employees’ work areas, receiving and shipping facilities.
• Observe manufacturing efficiency and productivity. Look for signs of excess capacity.
• Are they busy? Depending on the industry, be aware of the kind of activity that should be
taking place.
• Does employee morale seem high or low? If possible, ask employees to describe their
functions in the organization.
• What is the condition of equipment and other fixed assets?
• Are there plans to relocate any facilities?
• Include the salesperson in the visit to help explain the facility and add their interpretation.
Ask the salesperson to compare this operation to competitors’ facilities

Other source of Direct Investigation

The following sources are by no means exhaustive of the information available for credit
investigations.

County and State Government Offices

Perhaps the office contacted most frequently is that of the Secretary of State, which possesses
information about a company’s incorporation status: the date, the officers, the type of
corporation/LLC, any changes to the articles of incorporation or operating agreement of the LLC
and whether assumed names must be registered with the state. Depending on the customer, it
may be prudent to obtain a copy of the articles of incorporation or operating agreement of the
LLC. [Secretary of State, Headquarters, National Association of Secretaries of State (NASS), Hall
of States, 444 N. Capitol Street, NW, Suite 401, Washington, DC 20001 (phone 202-624-3525,
fax 202-624-3527 or web http://nass.org/)]. Other items to check at the state level are
professional licenses and permits, driver’s licenses and UCC filings.

The county courthouse is another resource as its records can provide details about lawsuits
filed or judgments rendered against a customer or potential customer. Tax and/or mechanic’s
liens filed by or against a customer may also be researched. This information can serve as a red
flag that there may be contingent demands by taxing authorities or other creditors that could
lead to the seizure of assets or otherwise usurp a creditor’s claim. Assets that the creditor
assumed would be available could be reallocated as a result of these legal filings.
Bankruptcy Court Information

To research a bankruptcy filing or possible filing, the credit professional needs to know the
name of the owner, the name of the company and in what county of the state the company
was doing business. Information about bankruptcy cases can be found online through the
United States Judiciary’s Public Access to Court Electronic Records (PACER) system. This
resource can be found at http://pacer.psc.uscourts.gov. Creditors can also contact the office of
the U.S. Bankruptcy Court Clerk with jurisdiction for the particular county of the businesses’
residence. This information is also available online and is listed in the Manual of Credit and
Commercial Laws.

Internet

The Internet is a resource for direct investigation that brings general information to the credit
professional almost immediately. Because of the legal implications, payment, banking and
other pertinent credit data are not available to the general public on free Internet websites.
Likewise, because of the confidential nature of critical data, email is not generally
recommended as a medium of exchange since emails may or may not be private and
confidential at all times. If email is to be used as a method for exchanging credit information,
the credit professional should take every precaution to maintain standard levels of
confidentiality. This may mean using encryption or other security measures to secure messages
and transmissions. Security also encompasses controlling access to the computer where email
messages are stored.

Customer Website
A considerable amount of information can be gleaned about a customer from their website, or
lack of one. At best, it is likely to provide useful details including the number of employees, a
full accounting of owners or officers, its geographical reach, related concerns (family tree of
companies), history of the company, how long in business, management plans for expansion,
product lines (which may lead to additional credit references) and other data that can be
verified against the information offered in the credit application or customer information
questionnaire. At worst, the lack of a website or a non-functioning site, may be a red flag.

Indirect Credit Investigation

An indirect investigation usually refers to acquiring information from third-party sources that
are in the business of preparing information on businesses/companies as opposed to
individuals (principals of businesses/companies). These third-party sources are referred to as
commercial credit agencies, bureaus or “repositories.” A credit report purchased from a
commercial credit reporting agency is an example of information obtained by indirect credit
investigation. In early American credit history, these third-party resources were referred to as
“mercantile agencies” or agencies that gathered payment information on merchants. Credit
reporting agencies have existed in America since 1841.

Third-party sources exist because gathering credit information directly can be time-consuming
and costly in terms of labor. Credit reporting agencies have on file, or can gather quickly, large
quantities of data at a cost that is lower than the labor, time and overhead (such as telephone,
postage, supplies, storage and related operating expenses) otherwise needed.

Industry Credit Groups

An industry credit group is composed of credit managers from several different companies who
share factual credit information about mutual customers and prospects. The first credit group
was established in 1875 by stationery and office equipment merchants. The concept
mushroomed, and, today, NACM Affiliates sponsor and operate more than 1,200 industry credit
groups throughout the United States. Still others are sponsored by private agencies.
An industry group pools information related to customer payment habits, financial histories,
business changes (e.g., ownership, address, merger or acquisition), and problems such as NSF
checks, judgments, liens and accounts placed for collection. Group members supply accounts
receivable and other information to NACM Affiliates or servicing organization database. The
service provider compiles the data, generates formal credit reports and makes them available
to industry group members. In the early days, all of this was done manually. Over the years,
automation on all sides has helped to reduce the time involved—and has improved the
currency, freshness and completeness of the information in most groups. Today, many groups
(and/or their hosts) require electronic full A/R file reporting to participate. Membership in a
credit group can often lead to opportunities to gather more complete customer credit histories.
Groups also keep members up to date on new legal rulings, developments in technology and
continuing credit educational opportunities. NACM Affiliate staff facilitates group meetings to
ensure compliance with the antitrust laws and regulations
Industry credit groups allow credit managers and analysts who sell to a common customer base
to engage in discussions designed to examine the current payment patterns and practices of
specific customers. They permit credit managers and analysts to separate “fact from fiction” by
comparing the customer’s reasons for slow or nonpayment to what other industry group
members are experiencing

Commercial (Business) Credit Reporting Agencies

Credit reports seek to help the user assess several, if not all, of the five Cs of credit by providing
insight into corporate structure, type of business, industry, ability to pay, willingness to pay,
existence and performance of secured and unsecured debt, existence and status of liens,
judgments or even bankruptcy. Most credit bureaus or reporting agencies provide reports on all
types of business structures.
Reporting agencies typically provide basic business and trade credit reports that may reveal
payment history, business background, public records, collection activity, banking relationships,
UCC filings and credit scores.

There are general, specialized and aggregating credit reporting agencies. General credit
reporting agencies gather credit information on any business regardless of industry or upon
receipt of an inquiry from a subscriber or member, delivering the information to the inquirer
and then storing that information on file for future delivery and updating of the subject file.
Specialized credit reporting agencies are more restrictive in the scope of the industries on
which credit information is gathered and of the type of information reported. They usually
serve a particular industry for which they gather very specific credit information. The jewelry
and furniture industries are two such examples that use specialized credit reporting.
Manufacturers inquire about wholesalers, and wholesalers inquire about retail stores or shops
to determine exactly how the particular customer pays other wholesalers or manufacturers
within the industry. Other reporting agencies that offer more focused industry information
include agencies or services that provide credit reports for the apparel, textile, aerospace,
automotive, chemicals, golf and giftware industries; seafood; and toy and drug wholesalers.
While all agencies gather information from creditors, members and subscribers about how a
subject of an inquiry pays vendors and suppliers, they also may source other information
unrelated to payment history that is of value. Aggregating credit reporting agencies are
typically resellers of the general or specialized agencies and use either individual data elements
or entire credit reports from these agencies, and may also include news feeds and external
econometric or publicly available data, to create a consolidated report. Aggregated reports are
an excellent way to compare sources of information and to reduce the likelihood of a “no
record.”

Commercial credit reports can be also defined as compiled or developed, or a combination of

both. Compiled reports are pulled together from automated sources of data and are matched,
merged, de-duplicated and updated without any or much human intervention. Developed
reports are usually freshly investigated, potentially using compiled reports as a source, but
often including interviews with the subject itself and direct verification of references. Both are
valuable, with developed reports usually priced much higher due to the intensive work
required.

While some creditors use one source exclusively, given the diverse and substantial amount of
information available, along with pricing flexibility, it is suggested that comparisons on a diverse
range of clients be done on a periodic basis to determine the best sources.