How do I Rate a Credit Report? Learn from an Expert!
You came into contact with a potential customer. The first feeling is good, but getting paid on time is a prerequisite for doing business. So, you decide to request a credit report. After receiving you ask yourself what exactly is. What do all those figures say? How do I review the data?
With the tips you read in this article, you will also become an expert in understanding credit reports. You make decisions that fit your business strategy and avoid late payment or non-payment.
Before you request a credit report
You can already do the first screening on the ascription of a company. Is the name logical? Is there a story behind it? Why is a company called ‘ABC Tools’ for example, while you get an order for supplying 50 items?
If you do not understand a name, ask for interest where it comes from. A good story behind a company name says something about an entrepreneur!
Also, check whether the name in the credit information report matches the company with whom you do business. Some companies are known to you under a different name. Often these are trade names. See if you can find the trade name on the credit report. Is this not possible? Then contact your potential customer or supplier and ask for a statement.
The business summary
In the company summary of a credit report you can find the following items:
- Company name
- Company status
- Credit limit
- Credit score
- Score description
- Company number
- Main activity description
- Most recent sales
- Most recent equity
- Rating indicator
- Profit for tax
- The main activity code determines the main activity description
- The credit score determines the score description and the valuation indicator (the traffic light)
As mentioned before, consider whether the company name is logical. If necessary, ask for the meaning of a name. Also, check whether the party with whom you do business matches the name on the credit report. Sometimes it can be found as a trade name. Contact your potential customer or supplier if this is not the case.
In which country is the company located? Be more careful with companies in the outside country.
Is the company active or not? Of course, you cannot do business with an inactive company.
Do not take the credit limit indiscriminately. Actually look at what you need. Are the ratios correct with the credit you want to provide? Keep in mind whether there will be more assignments in the future. Does the recommended credit limit still apply?
If the credit limit is too low, you are well advised to make other payment arrangements or to obtain additional information. This way you minimize your business risk.
Credit score, score description, and valuation indicator
The credit limit and credit score arise from data elements of a credit report that are weighed separately, but also in relation to each other. The score description and valuation indicator are linked to the credit score. In the overview below you will find the credit score, score description, and valuation indicator.
Credit score A = very good credit rating (green light)
Credit score B = good credit rating (green light)
Credit score C = creditworthy (green light)
Credit score D = careful (orange light)
Credit score E = no score (red light)
Do not blindly deal with these outcomes. Ask yourself this question: ‘How much business risk can or do I want to run?’ Then assess whether the amount of the credit limit and the credit score match this risk. What does it mean to you if the client pays late or not even?
Most recent sales
This is the turnover of the current financial year.
Most recent equity
This is the equity of the current financial year.
Profit for tax
This is the profit of the current financial year.
Company number, date of registration company and start date of the work
The company number is the number assigned by the Chamber of Commerce to the company. The date of registration tells when the company was founded.
Check if the founding date is also the actual start date for the company. It may be that the company has not carried out any activities for years or that the director has decided to buy an existing.
If the founding date is short in the past, the amount of information available is often limited. Company history and financial history are generally not known.
Tip: visit a starter and ask for his or her business plan and opening balance. The liquidity forecast and whether a bank loan has been provided are useful things to find out.
Please visit ReportingAccounts.com in order to read more about how to to score the credit reports of companies!