When and How to Run a Business Credit Check – Extending credit to consumers and business partners can be a terrific way to attract new companies and build trust, but it can also be extremely risky if thorough business credit checks are not performed first. Due to the time and expense of dealing with bad debt write-offs, late payments, and invoice disputes, most businesses rely on credit profiles to give the information they need to decide whether or not to extend credit.
Monitoring your customers’, partners’, and suppliers’ credit behavior might also alert you to other potential threats to your firm. Knowing ahead of time that a partner is in financial trouble or that a key supplier is going to go bankrupt, for example, allows you to take steps to safeguard yourself, such as enlisting new partners or seeking alternative suppliers.
Monitor Your Own Business Credit Profile Too
It’s just as crucial to keep an eye on your own credit profile as it is on your customers’, partners’, and suppliers’. Other firms and organizations will consider your company credit score when deciding whether or not to do business with you. Consider the following scenario:
- Banks and other financial institutions are hesitant to lend money to businesses with poor credit ratings. If they are awarded finance, they may demand a higher-than-normal interest rate. Similarly, potential investors are less willing to lend equity financing to organizations that are experiencing financial difficulties.
- Before issuing credit, suppliers will examine your credit score and, depending on the results, may deny or lower the amount of credit issued.
- Customers (especially significant ones) may consider your credit rating as a barometer of your company’s long-term health, especially if the products/services you provide require warranties and/or a high level of post-sale customer service.
- Low credit scores may have an impact on your insurance prices.
- You’ll need a solid credit record to attract investors if you want to expand your business.
- When it comes time to sell your business, a poor credit score can influence the value of your company as well as the time it takes to sell it.
Information Contained in a Business Credit Profile
A business’s credit profile contains detailed information about business accounts: In addition to basic information such as corporate addresses, parent companies, subsidiaries, branch locations, key personnel, and so on, a business’s credit profile contains detailed information about business accounts with:
- Banks and other financial institutions
- Credit cards
- Other creditors
- When the accounts were opened
- Payment history, terms
- Outstanding balances
- Past due accounts
Information from the public domain, such as federal, state/provincial, and county/municipal records, is also included in the credit profile, including unfavorable information such as:
- Tax liens
- Court judgments
Most credit profile providers offer a credit score, which ranges from 1 to 100, with a higher value indicating a reduced risk. Financial stability ratings are also included in some, which indicate if the company is likely to face financial difficulties (or possibly bankruptcy) in the near future. Consider the following scenario:
- Equifax’s Credit Risk Score is a measure of how risky your credit is “Over the next 12 months, the possibility of a firm having a 90-day severe delinquent or charge-off is predicted. A lower number indicates a higher danger, whereas a higher score indicates a reduced risk “.
- The Equifax Business Failure Score is a measure of how likely a company is to fail “predicts the likelihood of a company going bankrupt, either formally or informally, in the next 12 months. A lower number indicates a higher danger, whereas a higher score indicates a reduced risk “.
Obtaining a Business Credit Report
There are three primary credit reporting bureaus for businesses. Despite the fact that there are other credit bureaus, these are the three you should concentrate on. Each offers small businesses reasonable credit report choices (unlike individual consumers, businesses do not receive free credit reports every year):
- With over 70 million business credit listings, Dun & Bradstreet is the largest business credit reporting organization. D&B provides a variety of credit report choices. A single company report, for example, costs $61, whereas the Credit Reporter Plus package ($799) includes five reports as well as additional features like 12-month continuous credit monitoring.
- Over 22 million small businesses and corporations have credit reports from Equifax Small Business Enterprise. Prices range from $99.99 for a single report to $399.95 for a “multi-pack” of five studies that can be ordered at any time during the year.
- Experian SmartBusinessReports gives you access to credit reports for more than 27 million firms in the United States. Experian’s lower-cost services are suited for small-business professionals; products vary from $49.95 for single reports to $199 monthly subscription plans that include up to 30 monthly reports and continuous credit monitoring with email alerts.
Each credit agency has its own scoring model and gathers data from various sources.
Once you’ve received your company credit report from one of these credit reporting bureaus, double-check it to ensure that all of the information is proper and up-to-date and that no fraudulent activity has occurred. If your company’s credit report contains any inaccuracies or irregularities, contact the credit agency straight once to have them corrected.
Handling Customer Credit Refusals
If a customer’s credit check is negative, you should write them a polite, tactfully phrased statement explaining why you are unable to grant credit. Consider the following scenario:
“We regret to inform you that, at this time, we are unable to accept your credit request owing to the status of the economy and the inherent volatility in our industry. When our credit policies change, we will notify you. We really hope this does not have an impact on our business relationship “.
The note should express gratitude to the consumer and include payment options, such as cash.