Collecting the data and information needed to understand the creditworthiness of a small business can pose unique challenges. Many small businesses have financial footprints that are less established than those of larger companies, and their financial interests can be intertwined with those of their owners. Here are five tips you can follow that will help you evaluate the creditworthiness of a small business.
In assessing the creditworthiness of a small business, it is important to understand if the business is stable, if it can pay, and if it is likely to pay on time. This type of information can be gleaned from looking at a range of sources including financial statements, business registration details, trade payment history/references, and public filings. As it can be time consuming and expensive to figure out what information you need, collect it, verify its accuracy, and analyze it, many companies use business credit reports because they consolidate the critical information needed to assess credit risk in one place.
Business credit reports are created by companies specializing in business credit that collect, verify and analyze pertinent information from numerous sources, including public records and filings, as well as trade references. The reports also contain scores that rate a business’s creditworthiness as well as scores that predict the likelihood of credit delinquency. Business credit reports are available on millions of small and privately-owned businesses.
Small businesses tend to be privately owned. As a result, the financials of the owner and the business may be intertwined, and the owner might leverage personal assets to meet business obligations. You may also find that the small business you are considering doing business with has relationships with other entities owned by the same people. Furthermore, in small privately-owned companies, owners typically control major business decisions and company direction. Thus, when evaluating a small business, it is particularly important that you are comfortable with the ownership structure and the competency of owners and senior management.
Business credit reports can be particularly helpful as they specify ownership structure, including if a company is public or privately owned, and/or whether it is a subsidiary of another company. They also identify senior management. Additionally, recognizing the importance of company and owner relationships in small businesses, some business credit reports have predictive scores, such as Experian’s Intelliscore Plus℠ v2.0, which uses analytical models for small companies that incorporate both business and consumer data on the owner.
Add to the insights your gain from business credit reports by looking at consumer reviews. Customer opinions can give insight into a company’s business strength and growth potential. They can also help you spot potential business issues and give insight into how responsive a company is to its customers. Look at online reviews, forums, and social media sites and see what customers are saying. Is the feedback positive overall? Are customers recommending the company’s products and services? Or, if there are a lot of complaints, how is the company addressing the issues customers are raising?
Press reports can help you get a better understanding of a small business by providing insight into a company’s strategy and performance. When searching for news, make sure to include industry publications and local press in your search. Are you finding articles about new product launches and business expansion, or are you finding articles about lawsuits, employee layoffs, budget cutbacks, and product recalls?
Understanding how the small business you are evaluating compares with similar businesses can provide additional insight about its strength and trajectory. This type of information is available from companies that specialize in industry analysis. Many of them sell industry overviews and benchmark data for metrics including sales volume, profitability, and market penetration.
Business credit reports enable you to make confident credit decisions and effectively manage credit risk. Contact us to discuss how you can incorporate business credit reports into your credit decisioning, marketing and supplier review processes.
Eric Kider currently is the Senior Vice President/General Manager, Data & Credit Solutions. He is a highly motivated senior executive bringing more than 30 years of dedicated experience and a proven track record of driving significant revenue growth and margin improvement within, both, the financial and information services industries. Eric possesses expertise in all aspects of business management, including the development and oversight of sales, operations, product management, technology, and customer service. He holds a BS degree in Economics and Government from Skidmore College and took graduate courses at Sheffield Hallam University (Sheffield, United Kingdom).