Vetting Internet Companies for Credit
Should internet companies be treated differently for credit decisions than traditional businesses, and if so why?
These brief notes are for debate rather than providing answers. The ‘cyber world’ has more questions than answers, and even more irregularities. If the Net business stands up to Credit Policy Standards & Procedure and if the supplier can afford to allow one months credit (i.e. ‘ suck it and see’) that may be the best answer.
Outside of guess-work, the task of credit assessment will increase but to ignore it could mean cutting off a rich stream. I think, the main task is to break down those involved in the Internet to determine those with an element of risk over and above the ‘bricks and mortar’ (B&M) business.
For example
>>>>>>>>>>No change in risk
INTERNET PRESENCE WITH ‘BRICKS & MORTAR’ (clicks & mortar) BUSINESS REVENUE
Blue chip, plc, limited company or partnership, where the main business preceded the Internet business and accounts show profits or gearing for funding. Note: Consultancies would probably fit in here.
INTERNET PRESENCE ONLY Any of:
- Blue chip spin off,
- Say 2 year old plc’s Institute funded (VC, bank etc.),
- Trading profit in past year (not reliant on advertising revenue),
- Where accounts show profits or gearing for funding.
>>>>>>>>>>Increased risk
INTERNET PRESENCE WITH ‘CLICKS & MORTAR’ BUSINESS REVENUE
- Where Internet presence precedes B&M
- Where further development funding is required (as they all are)
INTERNET PRESENCE ONLY
The business that specializes or meets a need not at present of interest to the larger players will have as much capability of financing creditors as any other start up (taking the product into account; VISITS: sales :PROFIT).
Advertising placement is drifting towards the smaller sites with hard core specialist visitors: this will allow survivability and development. However, when it is possible for a company such as, say, Yahoo!, to become extinct overnight by the introduction of new search technology (and then why go to Yahoo! at all), the Net is potentially unstable throughout.
>>>>>>>>>>Poor Risk
INTERNET PRESENCE ONLY
If the business is trying to establish it’s self in a competitive area of the Internet where large players exist, the expected visitor and revenue figure is unlikely to meet (at best) medium term requirements. The chosen companies that get first/second level funding will survive and the rest will fold -irrespective of working 100 hour weeks.
Finally, many business’s have web sites, but only a small percentage will:
a) use the net for anything other than a brochure
b) still update it in 12 months
c) consider the net as a viable sales: resource option
‘Gut feeling’ will form part of credit vetting for years to come, as it has for years past. Many customers described as ‘the salt of the earth’ have subsequently defaulted for the first time in 20 years, and for an amount equal to many years profit. You must always be in control of your cash flow: the price to pay for taking above normal risk must compensate the worry and potential profit loss. If you have no reason to extend your current risk – don’t!
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