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Credit risk assessment using purchase order information

Author

Listed:
  • Suguru Yamanaka

    (Faculty of Engineering, Musashino University, 3-3-3 Ariake Koto-ku, Tokyo 135-8181, Japan)

Abstract

This paper proposes advanced credit risk assessment and lending operations using purchase order information from borrower firms. Purchase order information from a borrower firm is useful for financial institutions to evaluate the actual business conditions of the firm. This paper shows the application of purchase order information to lending operations and credit risk assessment, and reveals its effectiveness. First, we propose a “purchase order based” credit risk model for real-time credit risk monitoring of firms. Financial institutions can monitor the actual business conditions of borrower firms by evaluating the firm’s asset value using purchase order information. A combination of traditional firm monitoring using financial statements and high-frequency monitoring using purchase order information enables financial institutions to assess the business conditions of borrower firms more precisely and efficiently. Then, with high-frequency data, financial institutions can give borrower firms appropriate support if necessary on a timely basis. Second, we illustrate purchase order financing, which is the lending method backed by purchase order information from borrowers. With purchase order financing, firms that consistently receive purchase orders from credit-worthy firms can borrow money under more favorable lending terms than the usual lending terms based on the financial statements of the borrower firm.

Suggested Citation

  • Suguru Yamanaka, 2018. "Credit risk assessment using purchase order information," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-19, December.
    • Handle: RePEc:wsi:ijfexx:v:05:y:2018:i:04:n:s242478631850041x
    DOI: 10.1142/S242478631850041X
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    References listed on IDEAS

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    1. Michael Genser, 2006. "A Structural Framework for the Pricing of Corporate Securities," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-28685-1, December.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
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