Company Credit Assessment

Business credit reports and scores are vital risk management tools. That's why it's natural - and necessary -- to ask one question: Are they accurate?

The answer to this question can have a big impact on your risk management strategy and your customer relationships. Yet it can also impact your business directly if your own credit score is based on inaccurate or incomplete data.

Let's break this down and address each concern in turn.

Customer Credit Checks

The three major business credit-reporting agencies - Dun & Bradstreet, Experian, and Equifax - draw data from a number of sources to compile reports. In the case of Dun & Bradstreet, a company's Paydex score is also compiled from a company's payment history.

Most businesses strive to report accurate credit data on their customers and creditors. In the case of Dun & Bradstreet, the reporting agency also plays a role in managing the integrity of its data. As a result, the end product - the customer credit history - is typically both accurate and up to date.

Here's my recommendation: When you look at customer credit data, don't lose sight of the big picture. A report from a company like Dun & Bradstreet can provide a wealth of data on a company's history, key business metrics, payment trends, and financial stability. Even when an error does appear in a report, the overall trends rarely lie - and they can give you the resources you need to assess credit risk.

Checking Your Own Business Credit

This concern is even easier to address. That's because there's simply no excuse for not knowing what information appears in your own business credit profile.

Most consumers know to check their credit reports at least once a year. Businesses should do the same - but they should do so more frequently, given the amount of data that typically flows into a profile.

Don't just look at your credit score. Even an innocuous error like an incorrect phone number might complicate your business relationships - and they're easy to fix.

Monitoring and managing your credit profile is absolutely essential. Treat it the way you'd treat your tax records or financial reports, and you can be absolutely certain that your profile is accurate and up to date. And that will make it an essential business asset.

Earlier this week, I looked at the role that a Paydex score plays in the business credit-assessment process. It's a valuable tool and a great starting point for any credit risk analysis.

But it's not the only tool that you can - or should - use.

To understand why, let's take a closer look at what else goes into a complete business credit report. These are the types of things you'll learn from a source like a Dun & Bradstreet Business Information Report (BIR) - widely considered the industry standard for business credit risk-management.

• A summary that gives you an instant overview of a firm's line of business, sales, net worth, and general financial condition;
• Alerts dealing with ownership changes, bankruptcies, and other major business events;
• The Paydex Score, based on a company's payment history;
• Financial information including assets, sales, liabilities, and profits;
• Public filings such as lawsuits, liens, and judgments;
• A business history that provides insights into both the company as a whole and its key executives;
• An operations overview that covers things like what a business does, the number of employees, the location of key facilities, and known subsidiaries;
• A Payment Summary that breaks down a company's payments by industry, credit-limit histories, overdue payments, collection accounts, and a host of additional data.

In this context, a Paydex Score is a bit like a snapshot - while the additional data you'll find in a BIR is more like a three-dimensional look into a company's history, operations, and financial health.

Obviously, this kind of information is essential for making informed business credit decisions. Yet it's also a valuable tool for making other business decisions, including:

• Sales team planning;
• Marketing tactics;
• Evaluating product or marketing partnerships;
• Evaluating vendors and suppliers;
• Performing competitive research and analysis.

In other words, don't just look as business risk management as a credit question. The data you'll find in a report like a Dun & Bradstreet BIR allows you to manage risk across your organization. Just as important, it can alert you to new business opportunities long before your competitors get wind of them.

Business credit reporting is a booming industry these days. Some of the major names in consumer credit reporting, including Experian and Equifax, now offer services that cater to businesses.

For most businesses, however, Dun & Bradstreet is still the first and most important source of business credit risk-assessment data. And for Dun & Bradstreet users, the company's Paydex score remains the single best method for evaluating a firm's business credit score.

You're probably already familiar with the FICO scores used to assess consumer credit. Paydex is similar in that it quantifies business credit risk. Unlike FICO, however, Paydex looks only at whether a business makes its payments on time, according to the agreed-upon terms.

Here's what you need to know about how a Paydex Score works:

• A score can range from 0 to 100 -- the higher the score, the lower the credit risk.
• Scores of 80 or above generally mean that a business pays its bills early or doing the early-payment discount period.
• Scores of 70 or above reflect a company that pays its bills consistently on time and according to agreed-upon terms.
• Scores of 70 or below reflect a history of late payments -- lower scores may indicate payments 120 days or more overdue.

Like I said, Dun & Bradstreet's isn't the only business credit-scoring system in use. It is the most prevalent, however, and it's crucial for any small business that wants to establish and maintain a strong credit history.

Conversely, it's important for businesses to understand how they can use other companies' scores to assess their business credit risk; decide upon loan, trade credit, and payment terms; and monitor business credit for potential changes or signs of trouble.

Finally, you should know that while a Paydex Score is a good way to assess business credit risk, it's not the only tool available. In a future post, we'll look at some of the other business credit data sources a company like Dun & Bradstreet can provide.

Most small businesses learn to live with a certain amount of commercial credit risk in their lives. Yet it's still a nasty surprise when a trusted customer with an excellent payment history goes belly-up - and leaves you holding the bag.

Common Sense: The Best Risk Management Tool

An effective way to manage this risk is to perform a thorough business credit assessment on each new customer before you extend credit, and to continue performing regular customer credit checks on your existing relationships. A customer credit history can provide the insights - and the warning signs - your small business needs to recognize problems before they spiral out of control.

Even so, I think that old-fashioned common sense is still a business owner's most important risk management tool. Pay close attention to the details of your customer relationships, and you'll notice little changes that are easy to overlook. Put enough of these details together, and they just might tip you off to potential credit-risk issues.

Here are some examples of the subtle but important changes I'm talking about:

Senior management shifts. When a company shakes up its top leadership suddenly or unexpectedly, it's time to start asking questions. Sometimes these kinds of changes happen at a healthy company - but more often they're a sign of serious internal problems.

Banking changes. You already know that switching banks is a very big deal for any business. So if a customer or client starts paying you with checks drawn on a different bank, you need to take notice. That's especially true if a customer starts paying with personal checks or credit cards.

New payment patterns. Is a customer that typically pays within a week or two suddenly taking a month or more to pay? Are they paying on an irregular schedule or in lump sums when they weren't before? Even if the new payment pattern meets their contractual obligations, you need to ask why an established customer credit history is suddenly in flux.

A different address or phone number. Businesses move all the time, especially when they're growing fast or opening new locations. But it's important not to assume that a new address is a sign that all is well. After all, downsizing companies move, too - and that kind of move definitely has implications for a customer's business credit profile.

Changes in attitude. What do your sales and support staff notice when they meet with a customer? Do normally cheerful employees suddenly look worried or downbeat? Are familiar faces suddenly missing? Does the customer's office look thrown together and disorganized? Ask your employees what their gut feeling tells them about a customer's financial status, and take their input seriously.

Unexpected or unusual business disputes. When an established customer suddenly complains about the quality of your goods or questions your support policies, it's natural to blame yourself (and your team) for the problem. Yet it's also possible that the customer knows they're in financial trouble - and they want to buy time with disputes that allow them to get away with slow payments or missed payments.

None of these trends guarantee that you're headed for trouble with a customer or client. The more of them you encounter, however, the more important it is to look more closely at customer credit data and to make an informed risk-management decision.