Credit & Risk Management

How to use trade payment data for confident credit decisions

Knowing how a company you are considering doing business with has paid other creditors is an important indicator of how you will be paid. Trade payment data, predictive scores, and trade references can provide valuable insight into whether a company has demonstrated a pattern of responsible financial behavior and is likely to pay promptly in the future.

Trade Payment Data Can Predict If a Customer Will Pay on Time

Trade payment data is one of the best predictive indicators as to whether a company is likely to pay on time. Business credit agencies collect this data from third parties and use it to analyze how a company’s payment behavior compares with industry averages. They also use this data to create predictive scores, such as the Experian’s Intelliscore PlusSM v2.0, that predict the likelihood of credit delinquency. Trade payment data and predictive scores can typically be found in business credit reports.

Trade References Provide Insight into Payment Behavior

Speaking with a business’s existing creditors can provide very important insight into payment behavior as well. If your prospective customer provides trade references, ask them the following questions:

  • How long has the account be open? The history provided by the trade reference will be more reliable the longer it has had a relationship with the creditor.
  • What are the credit terms? (i.e. Net30, Net45, etc.) When evaluating credit terms, take the duration of the relationship into account. Shorter terms (such as Net10) could be due to the fact that the account is new. Longer terms (such as Net45, Net60) tend to indicate a more stable financial situation.
  • What is the payment pattern? Paid on time? Slow pay? Repeated delinquencies? Has the customer ever had a late fee, penalty, or interest charges on balanced owed? If the answer is yes, that can be a red flag.
  • What method of payment is used? While on its own, payment method does little to indicate the creditworthiness of a business, when combined with credit terms it can tell you a lot. For example: a short credit term (i.e. Net10) and payment by credit card could indicate a cash flow problem.
  • What is the line of credit amount and how does this compare with the average credit line with other customers? A credit line that is lower than average can indicate the trade reference has credit concerns, but it can also indicate the account is new. Alternately, an established customer with a higher than average credit line usually indicates the customer reliably pays its obligations.
  • Have there been any changes in the line of credit? If there is a sudden decrease in the line of credit, this could indicate a payment problem or that the account has been dormant for an extended period of time. On the other hand, if the credit limit has been raised due to continuous on-time payments that is a positive indicator.
  • Have there been any invoice disputes, and what was the outcome? While not all invoice disputes signal credit problems, repeated disputes, especially if the outcome confirmed the original invoice amount, could be a red flag.

If you are considering extending credit to a company be sure to check out its trade payment data and trade references. There is no better way to get insight into a company’s past payment behavior and how they are likely to pay you.

Contact us to learn more about how you can incorporate the business credit reports, trade payment information and predictive scores we offer into your credit decisioning processes.

Eric Kider
Risk Management General Manager

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).