Four companies that need a credit check
More than three years after the official end to the recession, U.S. businesses are recovering but not recovered. Uncertainty remains the mood of the day, with surveys showing that a sizable portion of private companies are worried that a potential lack of demand is a barrier to growth. Companies must protect themselves against financial and operational risks, even as they balance the need to service customers and plan for growth.
When should your business conduct financial due diligence on another company?
Sageworks Senior Financial Analyst Michael Lubansky says most companies at some point could find it useful to understand another company’s probability of default. Here are four types of businesses on which you should conduct financial due diligence:
“If you’re depending on a company to provide the supplies you need for your business operations, and if the supplier is not financially sound, you potentially expose yourself to problems that may slow your own business operations,” according to Lubansky. This could result in a shortage of raw materials or inventory, making it difficult to supply your customers. A supplier providing you trade credit can also affect your cash needs if they go out of business.
Vendors or distributors of your own products can potentially create reputational risk if that seller is not financially sound, Lubansky says. “That could reflect poorly on you as a business operation.” Additionally, a vendor default could force you to scramble for a replacement in order to prevent the loss of revenue and/or sales channels.
Some businesses may find it helpful to run a business credit report for a major customer, too. A financially troubled customer could mean not only lost sales but also fresh risk related to collecting accounts receivable.
4) Your Own
When a company is evaluating its own financial health and planning for growth or for weathering a downturn, an assessment of your current situation and probability of default helps create a more complete picture.
The same is true for a company that is considering applying for a loan. Knowing your own business credit rating prepares you for potential objections on the part of a lender and can build credibility as you negotiate on rates and fees. Companies that have business credit ratings and understand their own default risk can also use that information in negotiations with other businesses. Similarly, deals involving mergers or asset purchases may be better informed with information on how likely it is the counterparty will default within a year.
To learn more about the challenges corporations encounter when evaluating the creditworthiness of potential customers or partners, and some of the best practices for analyzing risk, download the whitepaper titled: Credit Quality Matters: Evaluating Financial Risk.