You need to ensure your own business’s credit record is healthy, and you need to keep a watchful eye on how much money is owed you, who pays on time, and who is overdue.
- Managing your business’s credit score
- Managing your debtors
Managing your business’s credit score
Building a good credit reference
Business credit scores help suppliers, lenders, and other creditors evaluate whether a company will pay its bills on time.
As a business owner, getting a business credit report on a contractor or business you plan to work with is a good way to verify that they don’t have issues that could cause problems for your own business. However, it’s an equally good way for potential customers and suppliers to vet you. This could work to your advantage, putting you ahead of the competition – or it could work against you.
Making better business decisions
First, before you can make accurate business decisions, you need sufficient data. You want access to as much information as possible before making a decision. A lack of sufficient data means your credit decisions are being made in a vacuum.
On the other hand, business owners that know exactly what is happening with their company’s financials can control their budgets better and make good financial, credit and business decisions. The access to accurate and reliable information is quite simply the foundation of all good business decisions.
Increase your chances of signing deals and contracts
Any business negotiation or deal between two companies involves a level of risk. You are trusting each other to uphold the deal, make payments on time and run legitimate businesses.
While large businesses tend to have their houses in order, SMEs are less likely to have their books in order. This makes it difficult for the SME owner to provide the appropriate insight into their business required by credit departments doing their due diligence. A credit department could look into your business for a number of reasons, including for a loan application or due diligence by a company you have submitted a tender to.
Basically, a record is only as good as the information it contains, and when your business is very busy, you don’t have strong financial management systems in place, and you aren’t being audited like a larger business is, it’s often easy for information to be missed and for records to become incomplete and untidy.
Registering with credit bureaus
It’s a good idea to register your business’s information with credit bureaus like Experian and TransUnion. Websites like Credit Record will collate all the information available on a business as well. You can use these sites to keep track of your own credit record, as well as follow up on the credit health of other businesses.
Registering your business with a credit bureau will force you to create and foster an environment in which your business can trade as legitimately and transparently as possible.
This reduces your business’s own risk of failure (because you know what’s happening in your business and so you can make better decisions), but it also reduces the risk of anyone doing business with you. The more information they have on hand, the easier it will be for them to do business with you.
A business credit record provides valuable information such as default information, details and defaults on the principal or directors of the entity, civil court records, as well as confirmation of the business’s banking details and trading information.
Finally, ensuring your business credit record accurately reflects who you are and how you deal with vendors and suppliers can empower your business for growth. Make sure your records are in order, that your credit score is good and that you are registered on a credit bureau. This immediately increases your chances of signing large deals and contracts.
Understanding your credit score
Business credit reports
Business credit reports contain the following information:
- The business’s debts
- Court judgments
- Tax information
- Banking, insurance and leasing information
- Date of incorporation
- Corporate registration details
- Number of employees
- Number of years in business
- Names and titles of key personnel
Determining a business credit score
Three types of information are typically collected to generate a business credit report on your business:
- Credit obligation information from your suppliers and lenders
- Legal filings
- Company background information from independent sources. This includes local filing offices, banks, public records, collection agencies, marketing databases and corporate financial information.
This information is then combined with data from other sources, including:
- Public record information
- Collections information
- Payment performance in context with industry norms
- Actual trade payment experiences of clients
Calculating a business credit score
There are three key areas that combine to give your business an overall score:
- Public records:how recently, frequently and rand amounts associated with judgments, bankruptcies and liens
- Credit:The number of trade experiences, payment habits, balances outstanding, credit utilisation and trends associated with the business
- Demographic information:Years on file, business size etc
TIP: Separate your business credit from your personal credit
Many SME owners use personal credit to run their businesses. This could put your personal assets at risk if your business is ever in trouble. In addition, many creditors are moving away from relying on personal credit alone when judging a business’s financial health, particularly as personal credit is not considered an ideal predictor of business behaviour, and a host of blended commercial scoring tools are available that integrate both personal and business credit attributes to assess and predict SME risks.
However, if you are a sole proprietor, your business and personal credit are closely linked in the eyes of banks and other lenders. It’s important to take steps to protect both. Make sure you monitor, evaluate and protect your credit standing like you would any other business or personal assets
Managing your debtors
Deciding whether to grant credit
Depending on your business, you will either be a cash based business, or you will invoice your customers over 30, 45 or even 60 days. You may even be asked to grant even longer extensions of credit. While this can be a risk, proper credit checks, accounting practices and collection systems can smooth the process and reduce your risk.
Have firm systems in place
You need to be in control of your business’s full credit management cycle, which means implementing a robust and sensible system that you and your accountant and/or financial manager check regularly.
Your system should cover the following areas:
- Risk assessment
- Checking orders against credit limits
- Applying cash adjustments to the sale ledger
- Dispute resolution
All these systems should also be integrated with your broader accounting policies and practices.
Do a credit check
Step one is to assess your customer’s credit-worthiness. You can do this easily with a credit report. It will give you insight into any bad debt the company may have, as well as a full credit history, particularly how well the business manages its financial obligations.
Some credit reports even include a ranked rating of the potential risk the customer might pose.
Once you’ve received the report, it’s worthwhile comparing the information to the information supplied by your customer. Are the two consistent? Look out for fictitious names in particular.
These may be an attempt to hide the true ownership (and as such true liability) of the company. How long has the company been operating? A clear credit report could simply be a matter of timing – the company is too new to have incurred real debt.
NOTE:Many companies face legal proceedings at some point or another. A pending case is not necessarily a good indication of a high risk business.
Dealing with late payments
Even if you have followed all of the advice above, received the best credit checks and followed a careful risk assessment process, late payments and bad debt could still occur.
Make sure you have a firm late payment policy in place, and implement a fixed collections system. For example, until payment is made, retain ownership of goods (where appropriate for your business), charge interest on late payments, and follow a systematic and predictable collections process. This will show your customers that you mean business, make you harder to ignore, and ensure your invoices are at the top of the pile.
You should also put all correspondence in writing, ensuring that customers are warned before any action is taken, and then informed when action is taken.
If you call a customer, always follow the call up with written correspondence. Have a predetermined follow-up schedule as well. This will ensure that you stay on target, that your follow-up is predictable, and that you can become firmer with each correspondence. It also shows that you are serious about recovering the invoices outstanding.
NOTE: Always remain professional and courteous. A professional approach to debt collection will maintain a good reputation for your business in the long term, and it’s more likely to achieve successful results.