{"id":9659,"date":"2022-07-31T18:14:07","date_gmt":"2022-07-31T17:14:07","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=9659"},"modified":"2022-08-01T13:41:27","modified_gmt":"2022-08-01T12:41:27","slug":"why-run-company-credit-checks","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/why-run-company-credit-checks\/","title":{"rendered":"Why you should run company credit checks"},"content":{"rendered":"

Monitoring and understanding your own company’s credit score is crucial, but it\u2019s 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.<\/p>\n

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\u2019ll explore these questions, leaving you better placed to make informed decisions and protect your business.<\/p>\n

Why should I run a company credit check on a business<\/h3>\n

The success of your business relies on smart decisions and a healthy cash flow. But it\u2019s 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\u2019s survival and success to some extent.<\/p>\n

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\u2019t 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.<\/p>\n

Running company credit checks will enable you to:<\/p>\n

1. Protect your company\u2019s cash flow<\/h4>\n

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.<\/p>\n

2. Avoid untrustworthy or fraudulent businesses<\/h4>\n

SMEs are particularly susceptible to business scams and fraud<\/u><\/a>. 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.<\/p>\n

3. Protect your company\u2019s reputation<\/h4>\n

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\u2019s financial troubles directly impact your ability to provide goods and services or pay your bills, the knock-on effect will damage your own company\u2019s status.<\/p>\n

4. Make informed decisions<\/h4>\n

To make smart decisions about the direction and future of your business, you need to have detailed and objective information about who you\u2019re 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?<\/p>\n

5. Maintain a competitive edge<\/h4>\n

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<\/u><\/a> – ultimately, staying one step ahead at all times.<\/p>\n

Monitor regularly<\/h4>\n

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.<\/p>\n

Ideally, you should check their business credit score at least once per year to monitor their financial position and take preventative measures if necessary.<\/p>\n

What factors influence a company credit score?<\/h3>\n

A business credit score<\/a> is the measure of a company\u2019s creditworthiness. Based on past behaviour, the rating helps to show how a business manages its repayments and finances in general.<\/p>\n

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.<\/p>\n

Credit reporting agencies, like Experian, Equifax, and Dun & Bradstreet, consider a range of factors when calculating a company\u2019s credit score, including:<\/p>\n

1. Number of years in business<\/h4>\n

An established company that\u2019s 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.<\/p>\n

2. Payment history<\/h4>\n

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.<\/p>\n

3. Age of credit history<\/h4>\n

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.<\/p>\n

4. Credit utilisation rate\/ratio<\/h4>\n

A company\u2019s credit utilisation ratio<\/a> 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.<\/p>\n

5. Industry in which the company operates<\/h4>\n

Certain industries pose more of a risk than others. Thus, the financial health of companies working in riskier industries can be unpredictable.<\/p>\n

What information is provided in a business credit report?<\/h3>\n

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.<\/p>\n

Typically, a business credit report will include the following information:<\/p>\n