Using a Credit Bureau to Check Customer Credit

Giving credit to a customer is a big decision for a small business. By granting them credit you are, in effect, loaning them your money. Will they pay it back? Look at their credit history. It can help you predict how a customer will behave when it’s time to pay.

When a bank considers a consumer loan or a mortgage loan, it gets a credit rating from one of the three major credit bureaus. Then it decides whether to grant the loan and under what terms. Some of the terms that will be influenced by the credit rating are the amount of the down payment and interest rate, the length of loan, security, and financial-reporting requirements. You should follow the same process when extending credit to individual customers.

For customers that are companies, there are different credit bureaus. The eight major sources of commercial credit information you can use are Cortera, Dun & Bradstreet, Equifax, Experian, infoUSA, LexisNexis Corporate Affiliations, MarketWatch and Yahoo! Finance.

The first and most important piece of information to get about a company is who the customer is. Ask the customer for a Data Universal Numbering System number. This is a number assigned to more than 100 million companies around the globe. If a business doesn’t have a DUNS number, you shouldn’t necessarily deny it credit but you should think twice. A DUNS number makes it more likely that you can get accurate information from a bureau.

The information you’ll find in a credit report may include extended credit terms, trade experiences, principal’s history, financials (including net worth, cash on hand, accounts receivable, and accounts payable), Uniform Commercial Code filings, public records, liens, suits, sales, number of employees, and the company’s start date.

The cost of using a credit bureau starts at $10, depending on the service and the information requested. Using a commercial credit bureau is a cost-effective way to decide whether to grant credit and to monitor the company’s financial performance thereafter.

When considering the amount and terms of credit to grant a commercial company, look closely at the following:

1. Liens or suits against the company. If a customer is defending a number of lawsuits regarding payment or supplier issues, be very careful.
2. UCC filings. These are statements of debt security and collateral. If you’re taking security as part of the credit terms, you should check to see that the collateral isn’t already claimed and then make your own UCC filing to protect your rights.
3. Average life of the customer’s accounts payable. This will tell you how quickly the customer is paying its other vendors.
4. General customer financial performance. Look at historical and current revenue, net worth, cash on hand, and accounts receivable and accounts payable trends.

In addition to using a credit bureau, you should ask the customer for credit references and then actually check the references. In a closely held company, you may want to do a credit check on the individual principals of the company.

Providing credit to a customer is an ongoing process. The most important credit history to you is your dealings with the customer. Periodically reviewing the credit terms and amounts you’re extending to existing customers is a good way to avoid nonpayment.

John C. Shovic is a partner at MiloCreek Consulting in Coeur d'Alene, Idaho.