Business must be armed with psychological profiling skills to recognise bad debtors early

There is concern that this could lead to household over-indebtedness. This means that South Africans are, on the whole, becoming less creditworthy. Knowing the early warning signs of "bad debtors" is important to the survival of any business that offers credit to its customers. When assessing the profile of a potential recipient of your credit, in addition to the usual analytical inputs (i.e. financial ratios, poor credit records etc) personality characteristics are important to be cognisant of. In fact, without taking these softer issues into account, poor credit decisions are often be made. The following are questions worth asking about a customer, prior to granting or continuing to extend credit:

• Does your customer seem to have a tendency to procrastinate?
  Procrastination is a general feature of bad debtors and is a worrying sign. This may be experienced by creditors in the form of delays, especially relating to the provision of information. These individuals often postpone meetings and take a long time to return calls.
  
• Are there signs that your customer might be in denial regarding his over-indebted financial position?
  Frequently, bad debtors are in denial concerning the status of their financial affairs. What this means is that they persuade themselves and others that the amount of money that they owe is minimal, regardless of the size of their debt. Debt in itself is not bad; however, hiding from of its implications can be catastrophic. Be on the lookout for customers who don't have a plan to manage their debt.
  
• Does your customer avoid taking personal responsibility for his financial situation?
  Bad debtors resist taking personal responsibility for their financial situations. A poor credit history does not necessarily indicate a bad debtor. However, responsibility needs to be taken for past mistakes made. Bad debtors often provide plausible and, frequently, quite convincing reasons as to why it is not their fault that they have not been financially successful in the past and that they have had to accumulate excessive amounts of debt.
  
• Does your customer appear to have made over-indulgent purchases of assets?
  This usually includes multiple homes or unrealistically expensive cars. This is in part due to the unrealistic perceived success of his business venture or unrealistic expectations of its future success. These people often assume that they earned the right to indulge and spoil themselves, when in reality they can't afford to.
  
• Is your customer administratively weak?
  Weak administration is another key tell-tale sign of a business or individual that may represent a bad debtor. If a business is unable to provide basic information, like financial statements, identity documents and business records it is a very ominous sign and should not be ignored in your credit assessment.

Observations about personality are a very important component of any credit decision. Even in highly systematised and automated businesses (for example micro-loan businesses or furniture retailers), credit providers need to consider how they can incorporate observations about the personality characteristics into their credit decision formula and decision-making processes. This should result in more balanced and informed credit decisions being made.