Monitoring and understanding your own company’s credit score is crucial, but it’s equally important to run a company credit check on any business you currently work with – or plan to work closely with in the future. This includes business partners, clients, and suppliers.
But why is it so important? What financial information can you obtain about another company? And how do you run a company credit check? We’ll explore these questions, leaving you better placed to make informed decisions and protect your business.
Why should I run a company credit check on a business
The success of your business relies on smart decisions and a healthy cash flow. But it’s not just your own decision-making skills and financial health that are relevant here. Every business you work with plays a part in your company’s survival and success to some extent.
If a supplier is at risk of going out of business, you may not be able to deliver goods and services. Similarly, if a client doesn’t pay their bills, your company might struggle to pay its own bills. Moreover, if a business partner has an ambiguous history or undesirable reputation, their involvement could have a disastrous effect on your business.
Running company credit checks will enable you to:
1. Protect your company’s cash flow
Understanding the financial stability and payment history of other businesses can minimise the risk of late payments and unpaid invoices, help you to spot potentially unreliable or insolvent suppliers, avoid bad debt, and sustain revenues. All of these factors are key to maintaining a healthy cash flow.
2. Avoid untrustworthy or fraudulent businesses
SMEs are particularly susceptible to business scams and fraud. A company credit check will help you to determine whether a company is legitimate and alert you to dubious ownership details, questionable practices, or a history of unpaid debts.
3. Protect your company’s reputation
Many factors influence your reputation, including who you do business with. Being associated with the wrong supplier, client, or partner can have a considerable impact on your brand image and success. Similarly, if another company’s financial troubles directly impact your ability to provide goods and services or pay your bills, the knock-on effect will damage your own company’s status.
4. Make informed decisions
To make smart decisions about the direction and future of your business, you need to have detailed and objective information about who you’re working with. Can your suppliers meet your needs, or it is time to source new vendors? Will your clients pay on time? Do you need to make changes to your invoicing and payment terms, or are more drastic measures required?
5. Maintain a competitive edge
By keeping tabs on competitors and business partners, you can gain valuable insight into the current situation within your industry. This can help you to spot weaknesses, potential risks, trends, and opportunities for growth – ultimately, staying one step ahead at all times.
Regular monitoring of key businesses is also crucial. A new supplier or client may pass a business credit check when you first start working with them, but things can quickly change.
Ideally, you should check their business credit score at least once per year to monitor their financial position and take preventative measures if necessary.
What factors influence a company credit score?
A business credit score is the measure of a company’s creditworthiness. Based on past behaviour, the rating helps to show how a business manages its repayments and finances in general.
Unlike personal credit scores, which typically range from 0 to 999, business credit scores are measured on a scale of 0 to 100. The higher the rating, the more stable and reliable the business.
Credit reporting agencies, like Experian, Equifax, and Dun & Bradstreet, consider a range of factors when calculating a company’s credit score, including:
1. Number of years in business
An established company that’s been in business for a while will have more credit and payment information available than a startup. This makes it easier to calculate a credit score. Moreover, given that most businesses fail within the first three years, older companies are statistically more secure.
2. Payment history
Paying bills and invoices on time has a huge impact on credit scores. If a business consistently pays what it owes by the payment deadline, this demonstrates that it is a reliable borrower and manages its finances responsibly.
3. Age of credit history
Newer companies will have very little (if any) credit history compared to more established firms, whose longer track record of credit and repayment history indicate how well they manage their finances.
4. Credit utilisation rate/ratio
A company’s credit utilisation ratio is the amount of credit it is currently using divided by the total amount of credit it has available to use. A low credit utilisation ratio means that a company is using less of its available credit, which demonstrates good financial management.
5. Industry in which the company operates
Certain industries pose more of a risk than others. Thus, the financial health of companies working in riskier industries can be unpredictable.
What information is provided in a business credit report?
When you run a company credit check on a company, the credit score will be included in a business credit report. However, the score is just one part of the picture – you need to look at the entire report to fully understand the company’s financial health and level of risk.
Typically, a business credit report will include the following information:
- Company profile – business name, trading name, registered office address, incorporation details, and industry classification
- Business ownership details – directors, shareholders, and people with significant control (PSCs)
- Financial information – annual accounts filed at Companies House, previous and existing credit, trade credit secured, and payment history
- The number of finance applications made in the past
- Parent or subsidiary companies
- Notice of any county court judgments (CCJs), insolvency proceedings, lawsuits, liens, and other public filings against the company
- Recommended credit limit to extend to the business
What you should do with this information
This information provides valuable insight into how a business operates and manages its finances, allowing you to make educated decisions about who you work with and how much credit (if any) to extend to clients.
It is vitally important to analyse all of the information included in a credit report, rather than simply basing your decision on the credit score alone. By doing so, you will be able to spot trends and potential issues that could have a negative impact on your own business.
Common red flags to look out for include a gradual or rapid decrease in profitability, a history of late payments or unpaid debts, a high credit utilisation rate, and multiple finance applications in the recent past.
How to run a credit check on a business
Unlike a personal credit check, which can only be carried out with permission from the individual, anyone can run a company credit check on any company they’re interested in.
This means that it’s easier than ever to do your due diligence, know who you’re working with, make smart decisions, and protect the future of your business.
Whilst they all issue scores on a scale of 0 to 100, there’s no standard formula used to calculate credit scores. Each agency has its own distinct methods, criteria, and scoring systems, so results can vary ever so slightly depending on which one you use.
By and large, however, all three agencies look at the same common factors, like the age of the business, payment history, and credit utilisation.
When a formal business credit check is not an option
Sometimes it’s not possible to run a company credit check on a business. This may be the case if the business is new and doesn’t have a substantial credit file yet – or perhaps you have a limited budget or are short on time.
Whatever the reason, there are other options available that can provide useful information about a company’s creditworthiness and level of financial risk.
View company details and annual accounts online
If the business has been incorporated at Companies House, you can access their details for free via Companies House online search service. This includes incorporation details; registered office address; information about directors, shareholders, and PSCs; published annual accounts; and other filings made against the company name.
Conduct an online search
Enter the name of the business online, search for information about the owners and directors, and check the company’s website and social media accounts. This is a very basic type of check, but it’s useful nonetheless to get a sense of the business and determine whether any obvious red flags appear online.
Request references from banks, creditors, and suppliers
Asking for references from a potential associate’s banks, creditors, and suppliers is an effective way to gauge their reliability and the level of financial risk they pose. You can also get a clearer picture of what they’re like to work with and whether they pay their bills on time.
Run a personal credit check on the business owner
You can ask permission from the business owner to run a personal credit check, or you can request a copy of their statutory credit report. This is an effective way to determine how trustworthy and creditworthy the business owner is – and it should give you an idea of how well they manage their company finances.
If you’re dealing with an unincorporated business (e.g. a sole trader or general partnership), the business itself won’t have a credit history – it will form part of the owner’s credit file. In such instances, running a personal credit check on the business owner is a viable alternative to a company credit check.
Tailoring your payment terms
If you’re unable to obtain sufficient information on a potential client, or the business has a less than ideal credit history, you don’t necessarily have to refuse to work with them. You can simply adjust your payment terms accordingly by requesting payment upfront for goods or services provided. That way, you can protect your business without losing a potentially valuable customer.
So there you have it…
We’ve covered all of the essentials of running a company credit check on any company you plan to work with, including prospective clients, suppliers, and business partners.
Specifically, we’ve explained the ways in which this level of due diligence can benefit and protect your business. We have also covered the factors that influence a company’s score, the additional information contained within a business credit report, where to order a credit check, and what to do when a formal business credit check is not an option.
If you have any questions about this topic, please contact our company formation team or leave a comment below.