Credit professionals routinely evaluate multiple data points when assessing both prospective and existing customers. A thorough credit review reduces the likelihood of late payments or defaults by evaluating factors such as credit history, payment behavior, and industry risk. Central to this assessment, however, is a customer’s financial data, which remains one of the most critical inputs in determining overall creditworthiness.
Why Financial Statements Matter
Financial statements provide a comprehensive view of a company’s operating performance and financial position. While payment history and banking data offer valuable insight, financial information is essential for evaluating a company’s profitability, leverage, liquidity, and cash flow generation. Audited financial statements are preferred, as they are independently verified and generally more reliable. In addition, interim financial information should be requested throughout the year to capture changes in performance or risk profile. Interim reporting should include the income statement, balance sheet, and statement of cash flows.
When to Request Financial Statements
Because financial risk is inherent in all business activity, credit professionals should establish clear thresholds for when financial statements are required.
Common criteria include:
- Credit exposure (dollar amount)
- Geography or jurisdiction
- New versus existing customer
- Payment terms or contract duration
Once a threshold is reached, financial statements should be requested, analyzed, and spread. The outcome supports a clear credit recommendation to:
- Absorb the risk
- Mitigate the risk (adjusting credit limits, collateral, guarantees, etc)
- Avoid the risk
How to Request Financial Statements
Requesting financial statements is a standard due‑diligence practice for material or strategic customers and should be aligned with the organization’s overall risk appetite. That said, some customers may be hesitant to share sensitive financial information. To improve cooperation, we recommend the following approaches:
- Offer a Non‑Disclosure Agreement (NDA): This provides assurance that confidential information will be safeguarded.
- Use a well‑crafted request: A standardized request template promotes consistency, professionalism, and efficiency. The request should clearly explain the purpose of the review and specify the information required.
If a Customer Declines Full Disclosure
If a customer is unwilling to provide full financial statements, consider requesting high‑level financial highlights or key ratios as an alternative. Highlights may include total assets, total liabilities, net worth, revenues, EBITDA, and net income. Relevant ratios may include debt service coverage (EBITDA to interest expense), leverage (debt to EBITDA), and liquidity measures such as current or quick ratios. Alternatively, a customer visit could be proposed so financial information may be reviewed on-site, eliminating the need to transmit sensitive data.
Maintaining a standardized highlights or ratio template can streamline this process. While this data is less specific and detailed than financial statements, it can still reveal a lot about a customer and help you assess their credit worthiness.
Conclusion
Obtaining customer financial data is a foundational component of effective credit risk management. By establishing clear thresholds and applying consistent, professional request practices, credit professionals can improve transparency and strengthen risk assessment.
