Evaluating Credit Reports
Commercial Credit Reports
Commercial credit reporting has changed dramatically over the last 35 years. Gone are the days of relying on credit references provided by the company in question or waiting days or weeks for a response. (Besides, who would provide a vendor that wasn’t paid promptly as a reference?). Using standard credit applications is always recommended to obtain the proper billing address, contact person and phone number of the new customer; however, to make a truly informed decision more efficient options are necessary and readily available. Computer databases now gather, compile, classify and present pertinent credit data, allowing businesses to anticipate future payment behavior of their customers based on historical information. Thousands of companies across the country in a wide variety of industries contribute accounts receivable information monthly to various credit bureaus, including terms, recent high credit, current balance and aging. This accounts receivable data is typically broken down by industry and credit activity level so only the most current data is used in calculating the current days beyond terms. By reviewing this past payment behavior, identifying trends and cycles, future behavior may be anticipated. Many commercial collection agencies submit information to commercial credit bureaus about debtors placed, commonly the first step taken by a business in seeking outside help with outstanding accounts. The presence of recent collection activity can indicate that a company is experiencing cash flow problems. Multiple placements for collections over a longer period of time can be a key indicator of a business that is in the habit of defaulting on financial obligations, certainly not a good candidate for open terms. It is important to review the details on collection accounts to determine if the dollar amount, response time and payments justify excluding the extension of open terms. Legal filings and records are gathered on a daily basis for judgments, liens, bankruptcies and UCC filings. Whether a company had a dispute with a vendor or was sued for negligence, an open judgment is a financial liability and the seizure of funds by a plaintiff could create a serious cash flow problem. Tax liens at the local, state or federal level can be enforced at any time and also put a financial burden on a company, resulting in vendors not being paid. Stressed or failed businesses that have sought bankruptcy protection in the past may have done so as the result of poor business models or decisions and may be doomed to repeat this type of action. UCC (Uniform Commercial Code) filings allow leasing and financial institutions to secure movable equipment, vehicles and business loans. While the filing of UCC’s is a normal business practice, a multitude of filings may represent a business that has little or no assets of their own. Insolvent businesses with many UCC filings leave little to nothing for unsecured creditors to claim. All commercial credit decisions should be made based on factual, impartial information so that further concerns and complications can be minimized.
Consumer Credit Reports
While commercial credit reports may be requested for any business entity without the knowledge or consent of the business, consumer credit information is protected by the Fair Credit Reporting Act (FCRA) and requires a signed authorization by the individual. Consumer credit reports provide a complete history of an individual’s credit activity including mortgage, automotive, medical, credit card and revolving accounts, as well as personal judgments, tax liens, bankruptcies and collection activity. All the information is used to generate a score between 350 and 850 with relative risks outlined below:
619 and below
Bad to Very Bad
Consideration must be applied to all scores for the relative size, activity levels and end results for the reported details. A collection issue from years past may have been the result of a dispute or medical insurance issue that should not be used as the basis for denying open terms. Using credit reports to gain valuable insight on the history of a potential new customer (or on existing customers requesting higher credit limits) leads to more informed decision-making. Access to past payment, legal and collection information will help increase confidence in extending open terms to those companies that add more to the bottom line. Combining the speed and accuracy of 3rd party verified information with the minimal costs of the reports; the credit inquiry process is now fast and affordable.
Excerpt from original article titled “How Far Out on a Limb are You Willing To Go ? By Richard Bostwick, Senior Investigative Consultant for NCO Financial Investigative Services. NCO Financial Investigative Services (FIS) is a worldwide commercial due diligence firm, providing in-depth background investigations, public record research and detailed analysis to the global business community. Special thanks to Christina Grenga, Vice President - Business Development Ph: 914.213.1698, Christina.Grenga@ncogroup.com www.ncofis.com