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Simplifying Credit Risk Analysis for Businesses

Ann Marie Smith


Businesses take risks whenever they extend credit. Most customers will pay their bills, but slow pays and no pays can severely hurt your cash flow. Before you grant credit, you need a process for credit risk management and analysis to look for warning signs that can increase your risk and lower your profits.

When a debt goes delinquent, it takes time and money to chase payments. If it goes to collections, you may only get a fraction of what you’re owed. Writing off bad debt is a double whammy. Not only do you not get paid, but you also lose your investment in the products or services you provided.

Failing to apply regular credit risk analysis and management can hurt your cash flow and your working capital—negatively impacting your ability to pay your bills and dragging down your business credit score. This can have a downstream effect, creating problems with your suppliers and harming your ability to get credit or loans.

The State of Business in 2024

While seven out of 10 business owners believe they can weather a financial storm in 2024, they are not so sure about their competitors, and they have continued concerns about inflation, rising wages, and economic pressures. Many business owners are cutting back on expenses and raising prices amid tighter margins.

Many are also revisiting their credit policies and terms to make sure they adjust for uncertainty in the market.

There are good reasons to do so. Commercial bankruptcies increased by 22% in the first quarter of 2024 compared to the previous year. And, last year saw an increase topping 40%. As you know, though, bankruptcies come well down the line after businesses have already gone delinquent on accounts and failed to meet their credit obligations.

You want to see the storm clouds brewing before the storm lands on you.

There is also significant disruption in the marketplace. Rapidly changing consumer behavior, technological innovations, and supply chain challenges continue. Many historically strong businesses are seeing their customer base erode, and not every company is taking proactive steps to remain economically viable.

You need an easy way to handle your credit risk management and analysis to avoid taking unnecessary risks.

Simplifying Credit Risk Management and Analysis

When onboarding clients, a credit check should be part of your process. You need a structured way to assess the financial health of your customers and check their history shows they pay their bills on time.  Just as a consumer credit report provides information for businesses, a business credit report can give you similar insight into your business customers.

Unlike a consumer report, however, you do not need permission to run a business credit report as long as you have a legitimate business reason.

Many credit applications rely on self-reporting and references. Businesses may not always be transparent about their financial situation, or they may paint a brighter picture than is realistic. References can be troublesome as well. Businesses that are struggling financially will provide references for companies with which they are in good standing, but that does not tell you if they are having trouble meeting their other obligations.

Looking for Warning Signs

Business credit reports provide an overall credit score and details that help you assess financial health. Some of the warning signs to look out for when viewing a business credit report include:

  • Payment history: Days beyond term, delinquencies, and accounts sent to collections
  • Public records: Liens, judgments, or bankruptcy filings
  • Family tree: Financial troubles at parent companies
  • Credit score: Downgrades in overall credit scores or default risk scores
  • Business verification: Different information than what is listed on credit applications

A business credit report can also help you with red flags such as businesses that are in high-risk industries, make frequent changes to their business structure, or do not have a significant payment history.

With this information in hand, you can make better decisions about extending credit and ensure you mitigate your exposure. If you have concerns, you can deny credit or transfer credit risk to a third-party lender. You can ask for a down payment or cash on delivery. You can change credit terms, such as requiring net 10 or net 15 instead of net 30 for payment.

Balancing Credit Risk

For businesses, extending credit is a balancing act. You have to take some risks to close deals and sell your goods and services. However, you must get the balance right to avoid putting your business at risk.

Command Credit provides on-demand business credit reports from Experian, Dun & Bradstreet, and Equifax.

Get accurate, up-to-date business credit reports from Command Credit for your credit risk management and analysis.