Entrepreneurs and small business owners carefully scrutinize every decision, down to the cost of paper clips. But, ironically, many neglect to vet the biggest potential source of risk to their business – their own customers and clients. Even just one non-paying customer has the potential to sink a company.
Small businesses would do well to take a lesson from their corporate brethren and avail themselves of the business credit report. This fundamental financial tool is packed with information that can help a small business owner mitigate risk and make smarter business decisions because he or she will have access to up-to-date intelligence on current and potential customers. And, as many entrepreneurs are learning, business credit reports are no longer the domain of only the corporate world.
Peeling The Financial Onion
Long a staple of major corporations, business credit reports are increasingly being used by small businesses and entrepreneurs.
Introducing a credit report into the decision-making matrix significantly strengthens an entrepreneur’s ability to evaluate a potential customer; instead of relying on a Google search, a quick look at a prospect’s website or word-of-mouth to vet a new customer, a credit report adds an additional layer of objective, factual financial behavior and history to consider.
Most notably, it can tell a business owner how quickly a company pays its bills. If the company is consistently paying its other suppliers late – or, worse, defaulting on its bills altogether – a business owner can choose to walk away from the opportunity or establish strict payment conditions upfront. As every small business owner quickly learns, a sale is not a sale until the money is in the bank. Employing a credit report to evaluate a potential new customer can help spare a business owner the emotional and financial pain of dealing with a deadbeat client.
Six Critical Items That A Credit Report Can Reveal
Here are the most useful bits of intelligence that a business credit report can reveal about a company:
- Days Beyond Terms –One of the most conspicuous components of a company’s financial history, “days beyond term” refers to how many days past the due date a company pays its bills. A small business owner who knows in advance that on average her newest prospect doesn’t pay its bills until 45 days after they are due may choose not to accept the new customer. Or, armed with this critical information, she may decide to take the new customer – but demand cash up front. She also knows she may need to take additional steps to manage her cash flow with a slow-paying customer on board, although she risks affecting her own payment record in this instance. Credit reports also track any changes in a company’s bill-paying, so a small business owner can keep a careful eye on a customer who is falling behind on payments.
- Inquiry Records – A credit report reveals how many other inquiries have been made about a particular company. A high number of inquiries during a brief timeframe could indicate that a company is in financial trouble or has over-extended itself in order to stay afloat.
- Payment History – A company’s broad payment history – e.g. loans, leases, and expenses– is reported in a credit report. This offers a business owner a peek into a potential customer’s other financial obligations and its payment history.
- Judgments and Legal Data – A credit report will reveal if there have been any legal judgments, Uniform Commercial Code filings, tax liens or bankruptcies filed against the business, providing a reference point for further investigation.
- Officer Details and Company Structure – One of the most important elements of building a business relationship is the assurance that a company is who it says it is. A credit report will reveal an organization’s management team and directors, a list of who they are connected to, and whether they have relationships or affiliations with other companies domestically or abroad.
- Credit Score and Limit – Every business credit report reveals a company’s overall credit score along with a credit limit. A higher credit score and credit limit are both promising indicators that a company is in good financial shape.
Providers Are Not One-Size-Fits-All
Part of the new-found appeal of credit reports to the small business market is their affordability. Historically, a few major suppliers of commercial credit reports dominated the market, pricing the labor-intensive reports out of the range of most small businesses.
Today, a combination of technology and the increased availability of data, coupled with the rise of new competitors, has helped drive down the cost of credit reports. The industry is effectively experiencing a de-monopolization, and that’s good news for small businesses.
An online search for “business credit reports” returns a handful of top, reputable providers. Small business owners can also pursue recommendations from colleagues or local business associations. But, they should not get sucked in by a big name alone; it’s important for small business owners to take the service for a test drive to be sure they’re signing on with a provider who is the right fit for their needs. Any provider worth its salt will offer a free trial—or at the very least a free report. Small businesses should tinker with the various credit reports to determine which is the most thorough and straightforward, and clearly displays the information they need most.
More business credit bureaus are now offering subscription-based services, rather than a “per report” charge that can add up quickly. Whether an entrepreneur wants to vet two, 2o or 200 customers over the course of a month, he will pay the same, flat fee. Some credit bureaus offer subscription-based plans for as little as $100 per month.
Small business owners should take full advantage of a credit bureau’s offerings and also activate the free monitoring option that is available to users. If a customer’s credit rating changes, an alert will be sent to the business owner immediately, so that she can take steps to protect her business.
Entrepreneurs who are not using business credit reports are entering into deals blindly. They are neglecting vital financial information and intelligence that can protect them from the risk of bad debt. This due diligence is especially critical for small businesses and start-ups, where the financial margin for error is thinner. A business owner with access to more information significantly increases his chances of succeeding. Business credit reports are an important tool that can relieve an entrepreneur of having to chase non-paying customers and focus, instead, on growing a vibrant business.
This article was written by My Say from Forbes and was legally licensed through the NewsCred publisher network.