How to Read a Business Credit Report
Adapted from content excerpted from the American Express® OPEN Small Business Network
When you're considering granting credit to new customers, evaluating the reliability of potential suppliers, or analyzing your company's own credit standing, it is a good idea to run a credit report. A typical business credit report provides a snapshot of a company's credit history, including how it pays its bills and manages other financial obligations. Using these reports can help you mitigate risk by identifying warning signs of potential customers' credit problems. They can also help you determine whether your company is an attractive credit prospect for its suppliers.
Be sure that your analysis of a credit report includes a review of the following areas:
- Credit risk rating
Many credit reports include a rating system designed to help you gauge potential risk of late or delinquent payments. These ratings are often based on an analysis of a variety of credit factors, such as past payment performance and legal filings, and can be used to help you quickly make a credit decision. A "high risk" rating should be taken seriously.
- Payment history
Analyze past payments for signs of how a company manages its bills. Look for timely payments, as well as trends. For example, if you notice that a prospect used to make minimum payments on credit cards and is now paying each month's balance in full, it may be a sign that the company has developed a stable revenue stream and is therefore a better credit risk. It's also a good idea to see how a business' payment history compares to other companies in the same field. This will tell you if its payment patterns are in line with industry norms. When reviewing your own report, keep an eye out for similar trends that your suppliers may notice.
- Company information and background
A credit report will include the company's name, address, and phone number, and may also have information on its business type, industry (by SIC or NAICS code), number of employees, sales figures, incorporation status, and key officers. Review this information to make sure it is consistent with your company's records. If it is not, be sure to contact the company for an explanation. Be on the lookout for fictitious company names designed to hide the true ownership of a business, which may be an indication that the company is trying to conceal information.
- Legal issues
A credit report will contain information about bankruptcy filings, outstanding lawsuits, liens and court judgments that can help you identify new clients that may be credit risks, or suppliers who may or may not be reliable. Be aware that many companies have, at one time or another, faced some kind of lawsuit or other legal proceeding, so the presence of a pending case may not necessarily be important. On the other hand, companies that have liens placed against them or have gone through bankruptcy proceedings should be assessed seriously.
- Collection proceedings
Does the company have a history of letting its bills lapse, or having accounts sent out to collection? Be aware that some late payments may be the result of disputes over merchandise or other non-financial issues.
- Company age
Take note of how long the company has been in business. In general, companies that have been around for a number of years are better at managing money than young companies. Young companies may also be good credit risks, but you may need to do more research to assess their creditworthiness. In the case of a new company, check the personal credit reports of company leaders to gain insight into how diligent they are about monitoring bills.
- UCC filings
A company's Uniform Commercial Code (UCC) filings will tell you about the liens and leases it has in place. Review this section of the report for clues about how a company uses credit. If it has a number of assets pledged as collateral on existing loans and/or has a high number of trade credit relationships with other businesses, it may be overextended. Take these factors into account before deciding to add your name to its list of creditors.
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