When and How to Run a Business Credit Check

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Extending credit to customers and business partners can be a great way to attract new business and establish trust but can also be highly risky without performing proper business credit checks beforehand. Given that dealing with bad-debt write-offs, late payments, and invoice disputes are time-consuming and expensive, most businesses rely on credit profiles to provide the information they need to decide whether or not to grant credit.

Monitoring the credit activity of customers, partners and suppliers can also alert you to other potential risks that can impact your business. For example, having advance knowledge that a partner is in financial distress or an important supplier is about to go bankrupt enables you to pursue remedies to protect yourself, such as engaging other partners or pursuing alternate suppliers.

Monitor Your Own Business Credit Profile Too

Monitoring your own business credit profile can be as important as monitoring those of your customers, partners, and suppliers. Your business credit score will have an impact on other companies and institutions' decisions about their business relationship with your business. For example:

  • Banks or other financial institution are notably reluctant to extend financing to businesses with sub-par credit scores. If financing is granted they may demand a higher than normal rate of interest. Similarly, potential investors are less likely to provide equity financing to businesses in credit distress.
  • Suppliers will check your credit score before extending you credit, and depending on the results may decline or reduce the level of credit granted.
  • Customers (especially major ones) may use your credit rating as a barometer of the long-term health of your business, particularly if the products/services you supply require to have warranties and/or require a high level of post-sale customer support.
  • Your insurance premiums may be affected by low credit scores.
  • If you want to expand your business, you'll need a good credit report to attract investors.
  • When the time comes to sell your business, a low credit score can affect both your business's worth and the time it takes you to sell it.

Information Contained in a Business Credit Profile

In addition to basic information such as corporate addresses, parent companies, subsidiaries, branch locations, key personnel, etc. a business's credit profile contains detailed information about business accounts with:

  • Banks and other financial institutions
  • Utilities
  • Credit cards
  • Suppliers
  • Other creditors

Details include:

  • When the accounts were opened
  • Payment history, terms
  • Outstanding balances
  • Past due accounts

Also included in the credit profile is information in the public domain taken from federal, state/provincial, county/municipal records; including unfavorable information such as:

  • Bankruptcies
  • Tax liens
  • Lawsuits
  • Court judgments

Most suppliers of credit profiles include a credit score, typically from 1 to 100 where a higher value indicates lower risk. Some also include financial stability ratings, which are indicators of whether the business is likely to experience financial distress (or even bankruptcy) within the near future. For example:

  • the Equifax Credit Risk Score "predicts the likelihood of a business incurring a 90 days severe delinquency or charge-off over the next 12 months. The score ranges from 101 - 992 with a lower score indicating higher risk".
  • The Equifax Business Failure Score "predicts the likelihood of a business failing through either formal or informal bankruptcy over the next 12 months. The score ranges from 1000 - 1610 with a lower score indicating higher risk".

Obtaining a Business Credit Report

There are three major business credit reporting bureaus. Although there are many other credit bureaus out there, these are the three you should focus on. Each has affordable credit report options for small businesses (unlike individual consumers, businesses don't get free credit reports each year):

  • Dun & Bradstreet is the largest business credit reporting agency with over 70 million business credit listings. D&B offers a range of credit report options. For example, a single business report costs $61, while the Credit Reporter Plus option ($799) provides five reports and includes additional features such as continuous credit monitoring for 12 months.
  • Equifax Small Business Enterprise has credit evaluations for over 22 million small businesses and corporations. Prices range from $99.99 for a single report to $399.95 for a "multi-pack" which includes five reports at any time over a 12 month period.
  • Experian SmartBusinessReports provides access to credit reports on over 27 million U.S. businesses. Experian's lower cost offerings are ideal for small businesses professionals - products range from single reports for $49.95 to subscription plans for $199 per month that allow up to 30 reports per month and include continuous credit monitoring with email alerts.

Each credit bureau has its own scoring model and uses different sources of information.

Once you've gotten your business credit report from one of these credit reporting bureaus, it's important that you scrutinize it to make sure all the information is correct and up-to-date and that there is no fraudulent activity. If there are any errors or problems with your business's report, be sure to contact the credit bureau right away to get it sorted out.

Handling Customer Credit Refusals

If a customer credit check comes back negative you should send a polite, tactfully worded note to the customer informing them that you are unable to extend credit. For example:

"We regret to inform you that due to the state of the economy and the uncertainty inherent in our business we are unable to grant your credit request at this time. We will inform you when our credit policies change. We sincerely hope that this does not affect our business relationship".

The note should thank the customer, and offer alternatives such as cash payments.

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