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72710-when-to-stop-looking-for-clues-we-told-

WHEN TO STOP LOOKING FOR CLUES

We told you earlier where to start looking for clues about a customer`s creditworthiness, but we never said anything about when to stop. A detailed credit analysis costs money, so you need to keep the following basic principle in mind:

Credit analysis is worthwhile only if the expected savings exceed the cost.

This simple rule has two immediate implications:

1. Don`t undertake a full credit analysis unless the order is big enough to justify it. If the maximum profit on an order is $100, it is foolish to spend $200 to check whether the customer is a good prospect. Rely on a less detailed credit check for the smaller orders and save your energy and your money for the big orders.

2. Undertake a full credit analysis for the doubtful orders only. If a preliminary check suggests that a customer is almost certainly a good prospect, then the extra gain from a more searching inquiry is unlikely to justify the costs. That is why many firms use a numerical credit scoring system to identify borderline applicants, who are then the subject of a full-blown detailed credit check. Other applicants are either accepted or rejected without further question.

Americans Snap up Securities Overseas at Record Pace

Multinational Used to Bully Poor Countries.

Maybe They Should Start Again

Thus far we have pictured the financial manager as selling securities directly to, and thereby raising money directly from, investors. But often there is a financial intermediary in between. A financial intermediary invests primarily in financial assets. It provides financing to businesses, individuals, other organizations, and governments. Suppose a company wishes to borrow $250 million for 9 months. It could issue a 9-month debt security to investors. But given the debt`s short duration, it might be easier to arrange a 9-month bank loan.

In this case the bank raises money by taking deposits or selling debt or stock to investors. It then lends the money on to the company. Of course the bank must charge interest sufficient to cover its costs and to compensate its debtholders and stockholders.

Banks and their immediate relatives, such as savings and loan companies, are the most familiar financial intermediaries. But there are many others, such as insurance companies.

Box Head (bh1) That Is Long Enough to Make Two or Three Lines or Four

In the United States, insurance companies are more important than banks for the long-term financing of business. They are massive investors in corporate stocks and bonds, and they often make long-term loans directly to corporations.

Of course the company will issue not just one policy, but thousands. Normally the incidence of fires “ averages out,” leaving the company with a predictable obligation to its policyholto its policyholders as a group. Of course the insurance ders as a group. Of course the insurance company must charge enough for its policies to cover selling and administrative costs, pay policyholders` claims, and generate a profit for its stockholders. Suppose our company needs a loan for 9 years, not 9 months. It could issue a bond directly to investors, or it could negotiate a 9-year loan with an insurance company: Ala. Notice how the insurance company raises the money to make the loan: it sells stock,9 but most of its financing comes from sale of insurance policies. Say you buy a fire insurance policy on your home.

Alb. You pay cash to the insurance company and get a financial asset (the policy) in exchange. You receive no interest payments on this financial asset. But if a fire does strike, the company is obliged to cover the damages up to the policy limit. This is the return on your investment.