Company Credit Reports As Part Of Financial Due Diligence

Businesses offering credit usually take risks and make it a part of their standard operating procedure. But if you want to be smart and stay on the market as long as possible, you need to do everything to minimise credit risk by carefully assessing financial strength and credit history of new customers regardless of how big and established they are. Here are some ways to do it.

Using a credit application. Before extending credit to anyone, make your new customers complete a credit application form with basic information such as name and address, federal tax identification number, years in business and owners’ or key executives’ contact information. Such a form is very similar to company credit reports and usually specifies how much credit the prospective customer is requesting as well as names and contact information for bank and vendors that supply it with goods and services.

Verifying the information. It’s important to verify information submitted on a credit application. The better your customer’s record paying other vendors on time, the more comfortable you can be extending credit. But first you need to confirm those factors. You can contact the applicant’s bank to find out how long they’ve done business together and how much money is in the company’s account. You can also ask trade references how long the applicant has done business with them, how much credit it has, the date of its last payment, how much of its account is past due and how long it typically takes to pay its bills.

Buying company credit reports. In addition to collecting information about your customer, you can purchase credit reports from companies such as Dun & Bradstreet and Experian or from online credit check companies. These reports can help you assess how promptly a company pays its debt to its suppliers and lenders as well as take into account the company’s size, history and reputation.

Depending upon the type of companies, buying company credit reports for every new customer may not make economic sense. It may be worthwhile to pull reports on larger companies you know you’ll be doing a lot of business with but not smaller ones. With smaller companies you don’t always get a lot of information but you can purchase a personal credit report on a potential partner’s owner or president instead. Sometimes bad personal credit practices might spill over into business affairs.

Extending credit to new customers is never risk free but you can still take steps to minimise that risk and buying company credit reports is one of them. As the viability of many businesses is threatened by a weak economy, it would be a big mistake to save on financial due diligence.