Why business credit reporting is so important.
Most businesses extend credit to existing customers in order to retain them and to attract new clients, so credit plays an important part in any business. Business credit reporting is a system that collects debtor data and makes it available to businesses to enable informed decision making.
In essence, credit is a trust that allows businesses to trade with each other on debt with the promise of future reimbursement. It plays a very important part in the day-to-day running of businesses and helps them to keep functioning even at times when cash is not immediately available. Credit also helps companies grow by providing capital that can be used to increase production capacity.
The downside to credit
Although credit has numerous benefits, it does have two major problems associated with it:
- The risk of bad debt. When you extend credit to a customer, there is always a chance of not getting paid back the money owed to you.
- Delayed payment. Some debtors will take longer than agreed upon to pay you the money they owe. This affects the company’s cash flow which in turn affects its ability to fund day-to-day-operations.
But even with these risks, businesses still have to extend credit to customers to retain them and attract new ones. Business credit reporting helps reduce these risks by providing the information you require to decide on who to extend credit to.
The fix: How business credit reporting mitigates credit risks
Business credit reporting is a system that collects debtor data and makes it available to businesses for informed decision making. Credit bureaus (the companies that maintain credit reporting systems) collect information from suppliers and combine this with other information such as court judgements, public notices and debtor defaults to give you a clear picture of your customers’ ability to pay their debt.
With the information you get from credit bureaus, you can decide whether to extend credit to a customer and which terms to use.
Credit reporting provides you with information on:
- The customers’ ability to pay on time. This will help you make plans to avoid running into cash flow issues.
- The health of the business you are giving credit to. This gives you insight on the financial health of would-be debtors so as to avoid bad debts due to bankruptcy. This information will also prove invaluable when choosing long term partners.
Credit reporting provides you with adequate debtor information to help you make sound financial decisions, proving true the saying “knowledge is power”.