All business owners depend on their suppliers’ ability to deliver on time and their customers’ ability to pay for the sold products. A business that constantly extends trade credit to suppliers, customers, and vendors know the importance of this dependability and the various financial risks involved when this trust is broken.
- Customers can make late payments, or worse, refuse to pay at all.
- Suppliers can avoid delivering products on time, or worse, not deliver anything after accepting payments.
What can businesses do? Stop offering trade credit? That’s not a viable option. Countless businesses depend on extending and receiving trade credit. The only solution is to systematically select customers and vendors with good credit scores and consistent financial track records. Company managers need to conduct thorough credit analyses on all potential debtors to ensure delinquent customers and vendors don’t pose serious threats to the business’s bottom line.
The best business credit reporting companies help them in doing so. They create detailed credit reports that answer important questions about prospective suppliers or clients, such as –
- Are they valid business entities?
- Does the supplier pay bills on time?
- Do they have any liens or judgments?
- Is the supplier financially stable?
The process of creating these reports is called ‘credit analysis.’ With so many instances of supplier fraud, assessing an organization’s creditworthiness before extending trade credit is more important than ever.
- In 2017, judges awarded claimants Milan Supply Chain Solutions $30 million in damages against at-fault suppliers Navistar. The supplying company had sold Milan Supply Chain Solutions defective products.
- In 2020, a European company transferred €6.6 million to fake suppliers for protective equipment and never received the products.
It’s clear that without thorough credit analyses, the current commercial environment is highly unsafe for businesses. These analyses expose a supplier, vendor, or client’s perceived ability to repay the money they borrow.
How Third Parties are Helping Businesses
Business managers have a responsibility to conduct thorough credit analyses on their own. Their pursuit of reliable suppliers and customers is further strengthened if they consult third-party business credit reporting companies. These experts gather a ton of information and present it in detailed reports. One glance at these top-level reports is enough to decide whether the business should or shouldn’t offer trade credit to the supplier or customer in question. These reports also indicate precisely what amount of trade credit the supplier or customer deserves based on their past performances. Usually, these vital details are presented in one-page summaries. Within minutes, businesses can be aware of the credit risks and other details such as –
- Whether the supplier or client has a valid business identity – explore details such as their names, official addresses, websites, tax ID numbers, corporate family tree details, etc.
- Assess the credit risk by knowing about their Intelliscore, past legal filings, past fraud alerts, Financial Stability Risk Score, etc.
- These reports also describe the supplier/client in detail exposing details such as their SIC codes, NAICS codes, Stock Exchange Information, etc.
- Their payment history is described explicitly. The report contains details such as their creditor balances, UCC (Uniform Commercial Code) filings, past lawsuits, trade payment summaries, etc.
If a business spots that one of its suppliers has suffered from lawsuits, bankruptcies, or UCC Filings in the past, it’s highly unlikely that it’ll continue business relations. That’s what these credit reports do – prevent businesses from entering potentially dangerous business relationships.
The Importance of Asking for Trade References
In addition to obtaining detailed credit reports from third-party business credit reporting companies, businesses must also ask their suppliers or clients for trade references. Trade references display whether the credit applicant fulfilled past credit demands. Yes, most applicants only choose to submit positive references. But, obtaining the existence of these positive references proves that the applicant is attempting to make up for any past negative payment experiences known to the credit bureau.
More importantly, trade references help credit managers understand the payment customs of the applicant. Sometimes, these reports are included in the business credit reports. Still, it’s important for businesses to re-verify this data and directly get this information from the ‘horse’s mouth.’
Some other steps that businesses can take to avoid potential fraudsters include –
- Ask suppliers whether they’re disclosing payment experiences with notable business credit bureaus.
- Make these demands a staple of their business relationships.
- Avoid extending credit to irresponsible suppliers or customers that aren’t open to sharing their Trade References.
When businesses extend trade credit to suppliers, clients, or other businesses, they do them a favor. In most cases, inexperienced businesses or suppliers that don’t have much liquidity ask for trade credit as it’s easier to receive than traditional business loans. Since these advances usually involve a lot of money, simply paying invoices on time isn’t enough. They must pass the all-important business credit report test!
Businesses must consult business credit reporting companies and discover whether their suppliers or customers are likely to repay on time and as per the creditor’s terms.