I was catching up on my favorite blogs this morning when I came across a maxim generally attributed to Warren Buffett. “Only do business with people you like, trust and admire.” Others give it a slightly different twist but the gist is the same. The timing was great given our deliverable of a post on “character,” the first of the 5 C’s of business creditworthiness.
The point of looking at the concept of character from a credit analyst’s perspective is the insights it can give to business owners and teams on how to supply the right proof.
Some creditors view character solely from a financial perspective, concerning themselves only with trust– Can I trust this business to pay its debts on time? Does the founder or owner have a reputation for paying bills on time? Credit scores initially gained popularity as an efficient leading indicator of this narrow version of proof of character.
I of that definition as the hub. The rings that extend from the hub are where this credit “test” are just getting more interesting as new forms of online data including rankings and ratings become available.
Looking at common credit practices, I see the next ring out taking the next logical step to include other evidences of reputation for acting with integrity and strength of character. For example, the founder or owner is consistently given high marks by customers and other stakeholders. These may be found in Yelp ratings, recommendations on LinkedIn or testimonials on the corporate website. Solid references from these business connections support two types of proof–the business is generally reputable and because its customers and stakeholders are happy, revenue will continue to flow along with other sources of financial stability.
Additional indicators would be a business that is active in the community and/or the industry in which the it operates. It seems reasonable that a team that has made itself visible will be careful to avoid other actions that could tarnish the company’s image. Bankers tell us there is another important side-benefit. If the business does fall on hard times, community support and solid peer networks can sustain the team in a way that makes it possible to survive.
AngelList – a popular service for startups seeking investors – uses the term “social proof.” This is another aspect of character. The quality, experience and reputation of a team’s network reflect back on the team. Confirmation from these people that they are connected to the team is the proof. Thus a potential lender or corporate procurement officer might place a bet on someone they haven’t worked with before because they know and trust members of the company’s board of directors or advisory council.
Some creditors are beginning to look at new forms of referencing available from social networking services such as number of followers on Quora.
Though character is the most subjective of the 5 C’s, it is about behaviors and traits that correlate to likelihood the business will survive and pay its debts. Still, the concept of social proof in credit analysis is one we expect to grow in importance even as it adapts to interesting new ways to build a track record for the team as individuals and the business itself. More material for future posts!