Before deciding whether to lend you money, sign a contract, or offer you anything from a long-term lease to a business energy package, service providers and other firms run a check to see if you're a safe bet or not.
To do that they check your business credit report - a document that is independently put together, publicly available and contains information about how good your business has been at paying bills in the past. This can be done with a free business credit check.
This information is typically rounded up to a single score, showing people how safe a prospect you are at a glance - your business credit score.
The good news is that you have the right to check the information credit reference agencies hold on you and correct any errors you see. There are also plenty of ways to improve your score if you want to boost your chances of getting accepted for the best deals.
A business credit report is a record of your history of managing and repaying debt, any adverse events a business has faced, as well as any previous/current directors amongst other information. One of the best ways to mitigate risk within your business, it to perform a credit check (through a reputable business credit report provider) as part of your onboarding process for any partners. This way you can prevent risk before it becomes an issue.
This is particularly useful if you have multiple suppliers, clients, important stakeholders etc. as some credit report providers offer the possibility to monitor a series of companies at the same time. The information not only gives you a credit report/score, but a complete picture of what is impacting businesses the most.
The ability to compile a list of companies you want to observe enables you to not just review their financial situation, but also be notified anytime a change occurs to their financial status. It is then possible for you to react to certain situations before it’s too late, alleviating risk to your own business. It’s also possible to monitor prospective clients and competitors for a better understanding of the wider industry.
A company credit rating shows how creditworthy a business is.
A credit rating agency provides this via a company credit check. Credit rating agencies have a database of financial information that they consider when calculating a company’s credit score. This specific weighting framework and algorithm mean that although companies may have access to the same information:
As well as other relevant intel, the credit scores given by different credit rating agencies may differ. Other companies can then check their credit score before going into business with them, to assess whether to credit the company or not.
Most business reports include a financial assessment that gives a summary of a business’ potential and profitability; it also highlights critical points of risk, if any, that will assist businesses in making information driven decisions.
Some reports also contain trade payment information. This provides the opportunity for you to learn about existing or potential business partners payment behaviour. From this you can gain a better understanding of how likely they are to make payments within a certain period. Choosing a company that has fewer creditor days (number of days it takes a company past the agreed date to pay back a debt) will allow you to reliably make financial decisions for the future.
Alternatively, if you notice a current client’s creditor days are increasing, you have the chance to renegotiate deliveries specific to that client so your future financial situation would not suffer; it always better to know risks to your business so you can prepare in advance.
Delayed payment from clients will start to affect your ability to pay your suppliers in time, as well as make it more difficult to plan for short/medium terms no matter how good your company’s financial management is.
Sustainable business relies on offering clients trade credits they can reimburse, but this comes with risk of estimating which clients can be trusted to minimise risk. This is where the importance of due diligence comes into play. A check that assesses and monitors the creditworthiness of business partners proves to be crucial; especially concerning ones susceptible to financial fluctuations and trade breakdowns. This helps your business avoid financial/legal issues and save time and money that could be wasted chasing late payments.
It is also important to complete due diligence of suppliers. If you don’t check suppliers are trustworthy, it’s possible you will have shortages and must source new materials or services to keep activities running if one provider falls out of business. This would be very difficult as you would have to find a source that can deliver the same capacity and quality immediately. Even just one day of a business not functioning normally can have dire effects, this is especially important regarding the current global supply chain problems.
It can be a lot harder to predict how reliable a new company is through due diligence because of lack of information. However, this is where you can investigate the director. Even if the new company looks reliable, if the director has a history of previously being a director for multiple insolvent companies you can stop a risk before it becomes a risk, which is always best.
It’s always best to rely on facts rather than trust; use tools such as due diligence to gain insights into partners and protect your company.
In this article, we explore how Red Flag Alert helps insurers with onboarding, giving your business a competitive edge.
In this blog, we explore how Red Flag Alert helps you create an effective and sustainable onboarding process.
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