The ideal is to have financial statements, but this is unavailable for private companies globally outside of Europe with few exceptions. In lieu of financials, the commercial credit reporting agencies have created trade credit payment history on companies. This provides valuable insight into a company’s liquidity. However, in developing countries, trade credit info is unavailable for the vast majority of companies. The World Bank’s 2019 Credit Reporting Knowledge Guide specifically states credit scoring is nearly impossible in developing countries due to data limitations:
“The credit bureau databases in most developed countries have had many years to develop, are rich in information, and usually offer high-quality data, thus providing an ideal base for data mining and data modeling. The credit bureau databases in many emerging markets, however, are considerably less rich: They may have information only from banks and may not have operated long enough to house historic information. In these circumstances, it may be difficult, or indeed impossible, to build some of the sophisticated solutions, such as credit scoring.”
Yet, many online credit reporting companies have popped up offering credit reports on private companies in developing countries despite the lack of sufficient data (note: this excludes D&B, Experian, etc… who also cover individual consumers). Don’t be fooled by the 8+ page report with graphs and charts. Interestingly, since these credit reporting companies are focused exclusively on businesses (i.e. individual consumers are excluded), they generally operate outside of formal legislation or commercial regulation. The quality and accuracy of these reports is not subject to verification.
While there is undoubtedly value in the information gathered for a particular company, but there is rarely sufficient data to verify its credit standing.
1) Verify bank line availability and company’s good standing with local banks extending financing
Most companies are reliant on their bank financing lines. Given the data limitations of commercial credit bureaus in developing counties, the only reliable credit approach is to contact your customer’s bank for a credit reference. This will verify the presence of sufficient cash balances or availability on their bank line.
- Local banks are the credit authority on private companies in developing countries. This is attributable to access to the company’s annual and quarterly financial information, insight into available liquidity, quality of receivables, management stability, and expertise in the local economy.
- Noteworthy: what is the stability of their financing bank and the entire banking sector within a country? Several countries are dominated by large, multi-national banks (South Africa) which provides greater comfort, but others have primarily local banks (Brazil, Turkey) which require monitoring if you foresee sizable credit exposures within the country.
2) Monitoring your clients’ in emerging markets using daily price data to identify concerning trends
Although the financial statements and credit information is lacking for private companies in developing countries, you could monitor the economic environment in which they operate. Developing countries can be exposed to volatile currencies and commodity price declines. Daily price trends portend possible credit issues well before news stories reach the U.S. or Moody’s/S&P downgrades occur. Consider the following example for a Brazilian agricultural shipping company.
You could also overseas stock prices of publicly traded competitors of your foreign customers. Unfortunately, the capital markets in many emerging markets are heavily funded by international investors. During periods of economic stress, foreign creditor or investor confidence can decline quickly. The sell-off of securities results in a country imposing capital controls to prevent payments out of the country.
3) Willing to pay for a reliable report?
If the sale is larger, you could consider paying for an International Company Profile offered by the U.S. Commercial Service. An affiliate of the U.S. Commerce Dept, the U.S. Commercial Service knowledge has agents in most U.S. embassies who will actually visit the company for verification in addition to their local knowledge and perform credit checks (bank references, contact suppliers, etc…). Note: this agency’s focus is assisting small to mid-sized U.S. exporters. The cost is steeper for exporters with total sales exceeding $1bn.