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Mitigating Financial Risk with Business Credit Reports

Ann Marie Smith


Granting credit to a business involves a certain level of risk, so having access to accurate data is crucial when assessing that risk. As part of the credit application process, suppliers typically require customers to provide their business information. But you shouldn’t stop there. The information supplied may be inaccurate or omit negative information, which could sway your decision.

A business credit report provides a more comprehensive—and independent—assessment of credit risk to help you make better decisions.

Key Indicators of Risk

What do suppliers look at when trying to understand the level of risk associated with extending credit to a business? Here are some key indicators that you can analyze using business credit reports.

Trade References

One valuable source of information is trade references. Reports from vendors, banks, landlords, and other partners detail their payment experiences with the business in question. These references can highlight any history of late payments or defaults, which could be a red flag for suppliers considering extending trade credit.

For example, let's say a business is applying for credit with you. In the business credit report, you can check an overview of the applicant's trade references. Maybe you find that they've been consistently late on payments to several vendors. That could give you pause before approving the credit application.

Financial Information

Of course, a business's financials are also a crucial piece of the risk assessment puzzle. Most thorough credit applications require bank information to confirm the relationship between the bank and the applicant. Many also ask for financial statements, especially for larger lines of credit.

A business credit report will show payment trends and history. Depending on the type of report, you may get basic financial info like revenue, years in business, number of employees, and locations. For publicly traded companies, there may also be financial or income statements available online.

Public Information

In today's digital age, credit managers are likely to perform some good old-fashioned internet research on a new credit applicant. Positive news stories about the business expanding or winning awards would bode well for their creditworthiness.

On the flip side, reports of frequent management turnover or store closures could raise some red flags about the applicant's financial health and ability to pay.

A business credit report will show any public records, related to the business, that may affect your credit decisions, such as bankruptcies, liens, or judgments.

Credit Scores and Ratings

An Experian business credit report or other credit bureau report will use predictive analytics and statistical models to calculate credit scores and ratings for companies. These scores and ratings compare a business's performance to similar companies in the same industry or region, giving you a quick way to gauge potential risk.

For instance, a business with a poor credit rating relative to its peers might indicate that it's underperforming or presents a higher financial risk. Armed with this information, you can make a more informed decision about whether to extend credit and how much.

Making a Smart Credit Decision

At the end of the day, there are two main questions you will need to answer before extending credit to another business to mitigate your risk:

How likely is the business to default?

If a company's risk profile suggests it's financially stressed, you may decide not to extend any credit at all out of fear of taking on bad debt. Or you may decide to offer credit on more restrictive terms, lower limits, or require deposits.

How much credit should be extended?

Once a decision has been made to extend credit, you need to determine a reasonable credit limit and repayment schedule based on your credit policy—one that aligns with the borrower's ability to pay.

Different suppliers take different approaches when setting credit limits. Some base the dollar amount on a percentage of the borrower's net worth, while others simply match what other businesses have successfully lent and recouped from that customer.

Some business credit reports will provide you with a recommended credit limit based on an examination of the business’s financial health.

The Bottom Line

The bottom line? By carefully considering trade references, financial information, public data, and credit scores and ratings, you can make smarter decisions about extending credit to other businesses. This reduces your overall financial risk.

With Command Credit, you can pull business credit reports instantly from one or all of these credit reporting agencies:

  • Experian business credit report
  • Equifax business credit report
  • Dun & Bradstreet business credit report

Get on-demand business credit reports online 24/7 without a long-term contract. Contact Command Credit to get started.