Do you ever offer terms to your customers without checking their commercial credit rating first?
The credit of any business can easily be checked, and it should be your company policy to make sure this happens with every customer. The credit rating a company is given takes into consideration the likelihood it will meet its financial obligations. In other words, whether or not you will receive payment on your accounts receivable in a timely manner. Obviously, if their credit rating is bad, you may want to question whether it is worth doing business with them at all.
A commercial credit rating can be obtained from a major international rating agency such as Standard & Poors Ratings services, or a major commercial credit bureau such as Experian or Dun & Bradstreet. There are also many regional and industry specific agencies. The criterion used is based upon established and transparent ratings information, and each report will generally state the probability of a default in the form of a credit rating. They will also suggest credit limit, i.e. how much you can safely sell within the credit range. Additional information may include any liens in place, lawsuits, or judgments.
The Invoice Factoring Benefit
Experienced factoring companies will remove the worry and time it takes to obtain commercial credit ratings for your customers. A knowledgeable factor will know:
- Which rating agency to use for specific companies or industries
- The quickest way to obtain a report
- How to understand the finer details of a credit rating
- How to make a decision based on the information presented and how much risk they are willing to absorb, which in some cases may be more than your company would be prepared to undertake
It is worth remembering that credit ratings work both ways. Companies considering doing business with you may also check your commercial credit rating to assess their risks. Factoring your invoices can help boost your credit rating, as you are not taking on extra debt in the form of loans. Prompt payment of your invoices means you are able to pay your bills on time and take on more business.
When you are considering using invoice financing, factoring articles often reference credit ratings, but from a slightly different angle. The factor looks at your customer’s credit score rather than yours when you apply for accounts receivable financing.
So how can factoring help a business? When it comes to credit ratings, the invoice finance solution is twofold. Finance factoring will take the guesswork out of the amount of risk involved with your customers, and will quickly provide access to your working capital, enabling you to run your business, pay your bills and not worry about incurring debt, which could affect your credit score.