07 Nov

Why Should You Run a Business Credit Check?

What do you get when you run a credit history check on a business?
Credit Check Your Business Customers to Improve Cash Flow

“Credit is defined as the trust that allows one party to provide resources to another party where the second party does not reimburse the first party immediately (which creates debt), but instead makes arrangement to either return those resources or repay (with other materials of equal value) at a later date. The resources may be monetary or consist of goods and services.”
(Source: https://en.wikipedia.org/wiki/Credit_(finance))

What do you get when you run a credit history check on a business?

In short you get a credit report. A credit report contains a compilation of information regarding the way a business has been handling their debt. It includes information such as the amount of debt the business has accumulated, how it pays its bills, whether the business has filed for bankruptcy and other credit related information.
Where does this credit information comes from? Well, credit information comes from organisations referred to as credit reporting agencies or credit bureaus. Credit bureaus make agreements with businesses in which they send debt information to a pool from which they can all access shared credit information.

There are several reasons why you should run a business check before you get involved with a business. The main reasons include:

1.    To determine Longevity. If you are a customer looking for a supplier, checking the credit rating of a business enables you to determine how long the business will be around for. If the business has been notoriously defaulting on debt, then you can almost be sure that the business will not be there for long. The chances of a poorly rated business surviving for long are slim. This information will help you make wise decisions on the kind of relationship to maintain with this kind of supplier if you do end up choosing them. It will also help you avoid surprises if the supplier closes down.

2.    Determining credit worthiness. If you are supplying goods, services or providing loan facilities to a business, you want to know if your debt will be paid back.  By checking the credit of a business, you are able to estimate the possibility of getting your money back accurately.

3.    It helps in planning. Once you have done a credit check and discovered that the business in question does not pay on time, you can better plan your budget with more accurate payment expectations. You can also institute measures to encourage the business to pay on time such as discounts and fines for early and late payments respectively.

4.    Determining interest rates. If you are going to extend a loan to a business, performing a credit history check will help you determine the interest rates to offer. The higher the risk, the higher the interest rate will be.

5.    Business Valuation. If you are looking to find the true value of a business, a good place to start would be running a credit check on it. It can provide extra information that may not be available from the company’s financial statements.

CreditWorks Data Solutions help you access real-time credit reference information in New Zealand with the help of CRISworks – the country’s first and most comprehensive positive data credit referencing system. Avoid surprises by conducting a business check on the businesses you are about to deal with.

Credit Check Your Business Customers to Improve Cash Flow

Cash flow is defined as the amount of cash and cash-equivalents moving in and out of a business. When the cash flow is positive, it’s an indication that your business’ liquid assets are increasing. This liquidity enables you to settle debts, pay expenses, return money to shareholders, reinvest in the business and create a buffer against any unforeseen financial challenges in the future.

When the cash flow is negative on the other hand, it indicates a decrease in your company’s liquid assets.

One of the most effective (and often overlooked) ways of ensuring your cash flow is positive is by controlling the quality of your customers. A quality customer is not just a customer who pays their debt, it’s a customer who pays their debt on time. Because when it comes to cash flow matters, it’s not only about payment of debts by your customer but also the predictability of these payments.

We can agree that a company’s ability to attract new customers is what keeps the business growing. However, with these new opportunities, most business operators are tempted to begin business with new customers without really knowing enough about them. And this is risky because unless the customer is paying up front (which rarely happens), you’ll be selling your product on credit to a stranger.

Think of it this way; you are a bank that gives loans to strangers without evaluating the possibility of getting your money back. It wouldn’t be a great business model if banks did this, would it? By not doing your research to know exactly who you are working with, you could fail to identify crucial information that could indicate late payment or worse – no payment at all.

Let’s face it not all customers that approach your business are financially stable, which means you could find yourself chasing after owed money for a very long time. Waiting on money from an unreliable customer means that you’ll be unable to pay your suppliers, pay your workforce and cover other production overheads. In addition to disrupting operations this will create a bad reputation for your business which will negatively impact your own credit.

This is where credit checking comes in. By performing a credit check on your customers, you are able to take a peek at their financial situation and their past payment behaviours. From this, you’ll be able to make informed decisions about the customer you are working with. Performing credit checks on your customers helps improve your cash flow in the following ways:

1.    Determining your customers’ long term survival. You do not want to get into business with a company that is likely to go bust in a few months. By conducting a credit check on your customers, you will be able to identify companies that are not doing well financially and those that have already filed for bankruptcy. With this information you will be able to set the terms of trade without putting the survival of your business in jeopardy.

2.    Determining credit worthiness. All customers present themselves as good debtors who pay their debts on time. By checking the credit of your customers, you will be able to find out for yourself whether the business is likely to pay or not. If the business has a good credit rating then you can almost be sure that they will pay their debt as expected. This will help you ward off bad debts that could significantly affect cash flow and even the future of your business.

3.    Planning. Maintaining a positive cash flow is not only dependent on your customers paying their debts but also on the predictability of their payments. If you can predict accurately when a customer will settle their debt, then you can plan your budget better. A credit check will help you determine whether the company you are doing business with will actually pay within the agreed upon timeframe.

4.    Determining the terms of trade to use. When you have a good understanding of the customer’s capacity to clear their debt, then you are able to create trade terms that are most suitable for them. You can sell on a cash only basis to poorly rated customers and allow credit facilities for those with good credit rating. You can also include incentives and penalties for early and late payments respectively.

CreditWorks Data Solutions provide you with real-time credit reference information for businesses in New Zealand so that you can make informed decisions for improved cash flow.

About the Author

Alan Johnston
Alan heads up the Information bureau side of the business (CRISworks) as well as providing credit expertise and consultancy to clients in the areas of Credit Management best practices, credit training, Credit Terms of Trade reviews, PPSR education, and pretty much all other credit requirements of clients in need.

Leave a Reply