Any finance professional who has pulled a credit report on a European company has probably been delighted by the depth and quality of the financial data available, even for small companies that are not publicly traded. At the same time, they may have been puzzled by the lack of payment history that serves as the backbone for most commercial credit reports in the United States.
Conversely, European finance professionals are often dismayed by the “thin” financials available in an American credit report.
Commercial credit reports in Europe and the United States differ, a result of legal, financial, and cultural factors. The differences can create challenges for finance professionals who are tasked with analyzing — and comparing — companies in Europe and the United States. But several changes may soon result in a reporting model that is more consistent across the Atlantic, easing some of the challenges finance professionals now face in performing financial assessments in other markets.
Differing Credit Reports
The biggest difference between credit reporting in Europe and United States lies in the amount and type of information that business intelligence firms can access and use in order to produce commercial credit reports. In most of Europe, all companies above a certain size — regardless of how they are structured — must file regular financial reports with the appropriate government agencies. Credit reporting companies access this information and match it with other data, particularly adverse court information, in order to help derive credit ratings and limits.
The financial information available on European companies is generally considered to be of a high quality, although the lead times for filing can mean the data may be up to 18 months old. Credit reports in Europe are typically viewed as predictors of how likely a company is to fail.
In the United States, credit reports are more commonly used as a tool to gauge how likely it is that a company will become delinquent in paying its bills. Because the obligations for comprehensive financial reporting and transparency are considerably lower here than they are in Europe, similar levels of financial information are typically available only for publicly traded companies.
Credit reports in the United States are usually built using payment data and other self-collected and/or certified information, combined with adverse legal information that is collected at a state level. The advantage of the American system lies in its perceived relevance — a company can determine if and when it is likely to get paid — and the freshness of the data.
As different as the reporting is on either side of the Atlantic, there are benefits and drawbacks to both systems. From the perspective of the finance professional keen to take full advantage of what a credit report can offer, the best of both worlds would be the European level of filed financial data combined with the very current payment data collected in the United States.
A Shift in Europe
It is possible that the day may soon arrive when credit reporting in the United States and Europe more closely mirror one another. There are a number of pressures on the current European model that may lead to changes in reporting at either the individual country or European Union level.
The impetus for change in Europe is the political reaction to the aftermath of the global economic crisis that began in 2008. Just as it did in the United States, the crisis took a particularly hard toll on small businesses in Europe, many of which found themselves unable to access credit. There is a growing consensus in many European countries that more must be done to stimulate bank lending or to smooth access to alternative financing for small businesses. That broad concern across Europe is even more intense in some countries. Germany, for example, is increasingly concerned about the lack of start-ups in the country, prompting the government to push for additional tax breaks to encourage more entrepreneurialism.
There are several measures under consideration in Europe, all of which may lead to an eventual reduction in the availability of financial data on companies. The moves are being driven by concerns over three current issues in particular:
Perceived “Administrative Burden.” In an effort to make it easier for small businesses to operate, there are several proposals to relieve the filing burden for smaller entities. Any “micro-entity” in the EU — defined as a company with revenue of less than roughly $1 million — will soon be able to stop filing altogether. In some jurisdictions, like the U.K., smaller enterprises are already being granted the opportunity to file an abbreviated financial statement.
Data Privacy. Another EU trend that could limit the amount of available information on a company is a heightened interest in data privacy. Efforts to tighten and standardize data privacy regulations throughout the EU will likely result in less information being shared. Indeed, some company officers have already claimed that data related to their officer position is “personal” and cannot be accessed by any third-party agency without their consent.
Alternative Data. For all the reporting requirements in the EU, there is also recognition that many smaller companies — particularly those that are non-registered or non-limited entities — suffer because the data collected on them is not widely shared among lenders. In the U.K., the government is pushing for small businesses to have the opportunity to force their banks to share their data with other vendors, when a small business requests it.
The net result of these efforts is likely to be a significant reduction in the quantity of financial information filed in Europe, which will alter the data that credit reporting firms can access.
The data collection standards in Europe are very fluid at the moment. While financial data will continue to be available, the near-universality of it is expected to decline. Where the credit reporting firms will go to fill the gap remains to be seen. Nearly every credit reference agency in Europe is following the lead of its American counterparts and increasing its efforts to collect and use payment data, from both third-party suppliers and their own customers. Some countries — like the Netherlands — are already quite sophisticated at integrating payments data into overall financial reporting.
While the pace of adoption may vary from country to country, there is no doubt that a U.S.-style data stream — with its heavy emphasis on current payment information — will become more common throughout Europe, even as the breadth of financial data available may begin to shrink.
In addition to the shift in data availability that is underway in Europe, another trend is playing out on both sides of the Atlantic. While large corporations grasp the benefits of sharing payment information — the more we share, the more accurate the picture of our finances — it is a concept that is just beginning to gain traction with smaller businesses. More European and American companies are starting to appreciate a commercial reporting model that closely resembles the consumer model, in which information is voluntarily provided in exchange for an accurate credit appraisal. As that understanding grows on both continents, it could dramatically reshape the quality and availability of crucial financial data.
Both the European and the American commercial credit reporting systems have benefits and drawbacks for the finance professionals who use them. European credit information is typically very high quality, although it can lag in timeliness; it can be an excellent predictor of the likelihood of corporate failure. American credit reports, while lacking the depth of financial data found in a European report, nonetheless offer credit and finance professionals very fresh and actionable information that can help them determine how likely they are to get paid.
Proposed legislation in Europe may soon result in credit reporting standards that are more consistent on both sides of the Atlantic. For finance professionals who need to perform overseas financial analyses, the ability to conduct a true “apples to apples” comparison — with as much financial data as possible — will enable them to do a more comprehensive job.
Tyrone Davies is CFO of the Creditsafe Group, a supplier of online company credit reports.