Jeff Judy

Jeff's Thoughts - May 28, 2008

You Need a Crash!

There's nothing like a good crash to clear your head and sharpen your thinking. No, I'm not talking about a stock market crash or a housing market crash. I'm talking about a computer crash.

Of course, I know you have suffered through those from time to time. Anyone who works in an industry that relies as much on technology as ours does has experienced the consequences of a hardware or software failure. And it isn't fun.

But I think an imaginary crash, from time to time, can help you focus on what is really important in credit decisions, as well as other aspects of your customer relationships. Imagine that you have some key lending decisions to make today, but your computer is not going to cooperate a bit. You will have no access to financial statements or spreadsheets for the entire day, but you still have to make credit decisions.

How well would you do? Would you be so conservative that you lost some excellent customers? Or would you give away the farm?

Here's the thing: I strongly believe that the quality of the decisions you make in that situation would not be all that different from the quality of the decisions you are making with your computer's help. If you can't do a good job without the numbers, you are probably not doing that great a job with the numbers.

So how would you make your decisions?

First of all, I'll give you a hint: the answer is not "character based lending." Please, don't tell me anything about your gut feeling.
It is legitimate, however, to think about customer behavior. Do they answer questions quickly and thoroughly? Do they provide financial data in a timely manner? (If you don't know the answers to those questions without looking at your computer, you don't know enough about your customer to be lending to them.)
How is their type of business, their industry, faring these days? Do they have problems getting raw materials? Recruiting labor? How do energy costs affect them?
What is the competitive landscape for your customer? Is there room in the marketplace for them to make a steady profit?

You can do about 90% of the standard SWOT analysis (strengths, weaknesses, opportunities, threats) without turning on your computer. Stop asking yourself if the numbers make sense, and start by asking yourself if the business makes sense

And if the answer to the latter question is, "No," don't bother turning on your computer.