Exactly when and how should a business credit check be performed?
The extension of company credit to clients and business partners may be a powerful tool for attracting new business and establishing confidence. Still, it can also be very harmful if thorough business credit checks are not performed beforehand. Because dealing with bad-debt write-offs, late payments, and invoice disputes is time consuming and costly, most companies depend on credit profiles to give them the information they need to determine whether or not to issue a credit to prospective customers.
Following up on the credit activities of customers, business partners, and suppliers may also provide you with insight into other possible hazards that may affect your company. For example, knowing ahead of time that a partner is experiencing financial difficulties or that a critical supplier will go bankrupt allows you to take steps to protect yourself, such as enlisting the help of other partners or seeking other suppliers.
Maintain an eye on your own company's credit profile as well.
Keeping tabs on your own company's credit profile may be just as critical as keeping tabs on the credit profiles of your customers, business partners, and suppliers. Your company's credit score will influence the choices made by other firms and financial institutions regarding whether or not to do business with your company. As an illustration
Small firms with poor credit ratings have significant challenges obtaining loans from banks and other financial institutions. If they are awarded funding, they may seek a greater interest rate than is customary. Similar to this, prospective investors are less willing to lend equity funding to companies experiencing credit difficulties.
Your credit score will be checked by your suppliers before they issue you credit, and they may deny or lower the amount of credit you are provided based on the findings of the credit check.
Clients (huge ones) may look to your credit rating as a gauge of the long-term health of your company, mainly if the items or services you provide are subject to warranties and/or require a high degree of post-sale customer care.
Low credit scores may impact the cost of your insurance premiums.
Having a solid credit record can help you attract investors if you want to extend your company's reach.
When it comes time to sell your business, a poor credit score may hurt both the value of your company and the amount of time it takes to sell it.
When Can a Business Credit Report Be Used? What Information Can Be Found in a Business Credit Report?
Along with general information about a company, such as its corporate address, parent and subsidiary firms, branch locations, and essential staff, a company's credit profile comprises extensive information on its business accounts with the following companies:
- Banks and other financial institutions are included in this category.
Utilities
- Suppliers of credit card services
- Others who owe money
- The following are some specifics:
- When the accounts were opened, the payment history and conditions were recorded.
- Currently, outstanding amounts
- Accounts that are past due
In addition, information in the public domain obtained from federal, state/provincial, county/municipal, and other sources is included in the credit profile, which may contain negative information.
Most credit profile providers provide a credit score, usually between 1 and 100, with a higher number indicating a lower risk. Some include financial stability ratings, which are indications of whether a company is likely to encounter financial trouble (or possibly insolvency) shortly. As an example, consider the Equifax Credit Risk Score. "Over the following 12 months, this model estimates the risk of a company having a 90-day severe delinquent or charge-off. The score runs from 101 to 992, with a lower number suggesting a greater risk."..
The Equifax Business Failure Score measures how often businesses fail and "predicts the chance of a company going out of business, whether via official or informal bankruptcy, in the next 12 months." A lower score indicates a greater danger, and the scale runs from "1000 to 1610"...
Making a Request for a Business Credit Report
In the United States, there are three central corporate credit reporting agencies. Even though there are other additional credit bureaus to choose from, these are the three that you should concentrate on. Each of the following offers reasonable credit report solutions for small companies (unlike individual consumers, businesses do not get free credit reports each year):
D&B is the most prominent business credit reporting organization globally, with over 70 million company credit records. Depending on your needs, D&B provides a variety of credit report solutions. For example, a single company report costs $61, but the Credit Reporter Plus option ($799) delivers five messages and extra services such as ongoing credit monitoring for 12 months.
Credit assessments for over 22 million small firms and organizations are available via Equifax Small Business Enterprise. Prices vary from $99.99 for a single study to $399.96 for a "multi-pack," which contains five studies that may be used for 12 months.
Using Experian SmartBusinessReports, you may obtain credit reports for over 27 million firms in the United States. Single reports for $49.95 and subscription plans for $199 a month, which allow for up to 30 messages per month and include continuous credit monitoring with email alerts, are among Experian's more affordable services for small businesses and professionals.
Each credit agency has its own scoring algorithm and relies on a separate set of data sources.
You should carefully review and evaluate your company's credit report after you have received it from one of these credit reporting agencies to ensure that all of the information is true and up-to-date and that there is no evidence of fraudulent activity. If there are any inaccuracies or issues with your company's credit report, contact the credit bureau as soon as possible to get them resolved.
Recognizing and Responding to Customer Credit Refusals
If a customer's credit check results in a negative impact, you should write them a courteous, delicately phrased message advising them that you cannot issue a credit to them. As an illustration, it is with great sorrow that we notify you that, owing to the current situation of the economy and the inherent unpredictability of our industry, we will be unable to accept your credit request at the present moment. When our credit policies change, we will notify you. We genuinely hope that this will not hurt our business relationship with you."
The message should express gratitude to the consumer and provide options such as cash payments.