Get credit reporting to help protect your business

Small Business Guides

7 min read

Have you ever been caught out by a company with poor financial history? Or are you doing a deal with a new business and want to make sure they’ve got a good track record of paying suppliers? We spoke to Equifax, a credit reporting agency, to find out more about how small businesses can better manage cashflow risk by using credit reports.

Credit reporting gives you a realistic picture of a company’s finances

Cash flow is vital for your business, but how often has yours suffered due to overdue payments? With credit reporting, you don’t need to be in the dark any more about the reliability of a company you’re doing business with.

Knowing the credit rating of a business or supplier puts you on the front foot right away. You’ll get a good idea about how risky they are to do business with and find out how reliably they pay their bills. And you’ll be able to adjust your payment terms accordingly.

While you might feel credit reports are unnecessary (especially if you know who you’re dealing with), it’s good practice to do your due diligence. After all, a business’s financial circumstances can change quickly – and leave you high and dry.

Why not consider making credit reporting a routine part of business? For example, you could get credit reports on your suppliers annually to ensure nothing dire happened in the previous year.

How to get this credit information

Credit reports are worth paying for. Spending a relatively small sum of money upfront on a report might save you hundreds or thousands of dollars by avoiding late or non-payment.

Your business may deliver goods or services to other businesses, then give them a period of time to pay – effectively extending them credit. It’s important to know they’re financially secure. You want to be certain they can and will pay you back on time.

The team at Equifax say the lower the credit score on the report, the higher the predicted risk of a business. There could be many different reasons for this. Here are six key points about credit reporting you need to know:

1. A credit score is an indicator of future risk

A business’ credit score is calculated using many different factors. These include financial background about the company and the directors running it.

A credit report will typically show you:

  • Payment history
    Does the business pay their invoices on time? If they pay late, by how many days?
  • Legal actions
    Is the business currently in court about a matter that could impact their ability to pay their invoices?
  • Defaults
    Has the business formally defaulted for failing to repay money or loans?

Two very important things to remember about a company’s credit score are:

  • a low score means the business is high risk
  • a high score means the business is low risk.

A high-risk business (with a low credit score) may:

  • have defaults against them
  • be caught up in legal disputes
  • have directors with financial problems
  • often pay their invoices or bills late (or not at all).

On the other hand, a low-risk business (with a high credit score):

  • pays their bills promptly
  • has no legal action pending (they aren’t in court)
  • has directors with a good credit history (no bankruptcy, have never been disqualified or banned from running a company, and have good credit scores themselves).

Knowing a business’s credit score means you can set your payment terms according to the level of risk. It’s all about being informed.

The more you understand about a company – their financial history and their current financial situation – the easier it is to do business with them.

2. A credit report helps you identify if a company is in financial distress

There are almost always warning signs when a company is in trouble. These can include:

  • an increasing trend of late payment of invoices to you and others
  • selling off assets (fire sale)
  • staff cuts.

Knowing if a director has ever been declared bankrupt can also be a warning sign. You may still choose to do business with them – but when you're fully informed, you can set up payment terms to help protect your business from non-payment.

3. Credit reports can give you confidence that a company is real

You may have heard news stories about people or businesses who are the victims of fraud. When you are dealing with a real, valid business (as opposed to fraudulent or de-registered businesses) this will give you peace of mind.

Credit reporting confirms if a business is a legally registered entity and includes the registered names and addresses of the directors. These are basic business requirements. It’s good to know this before extending credit or doing business with another company – especially one you’ve never dealt with before.

4. You can modify your approach according to your customers’ behaviours

When you know a business’s credit score, you can manage your payment terms with them accordingly. And you’ll be able to minimise or plan for the potential impacts on your business. For example, if you know a business is high risk, it might be sensible to ask them to pay 50 percent upfront, or cash-on-delivery, instead of 30-day terms.

If the credit report highlights a pattern of constant late payment, treat the business with caution until you find out the reason why.

5. Know who you can loan money to, how much, and when you need to refuse it

Does your business allow customers to buy now and pay later? This might be by hire purchase or layby. If so, you need to include controls in your credit or finance systems using as much information about your customers as possible.

Accurate customer information isn’t just for marketing and product development. It also helps you to manage and minimise the risk to your business. Don’t just take someone’s word that they’ll pay you back on time. Check their payment history stacks up.

6. Always know who to deal with for payment

It’s always easier to have the payment conversation early on when dealing with a new business or supplier – before any issues arise. The information in a credit check will help you work out what questions you need to ask. Can you have an honest conversation with your main contact point at the company? If not, find out if they have an accounts person or team that you can deal with. Making sure terms are agreed upfront reduces the chance of any misunderstandings in the future.

Credit reporting can’t predict the future – but it can help you predict risk

When you’re doing business deals worth thousands of dollars, you can’t afford to take chances. Reduce your risk by getting a credit report. Business relationships almost always involve money. And every business has a history with money – sometimes good, sometimes bad. The more you understand about a company the easier it is to do business with them. And the relationship will be smoother for everyone.