3 Ways To Know If a Business Is a Credit Risk

3 Ways To Know If a Business Is a Credit Risk

August 3, 2022Credit Applications

As a business owner, you likely deal with other businesses that want to purchase your products but cannot pay you at the time of the sale. Extending lines of credit to your customers could be the best solution.

You may draw in more buyers if they have the option to pay you later on. However, you should know in advance if a potential customer is a credit risk.

A Credit Risk Could Harm Your Business

Businesses with robust assets and a healthy cash flow are a good bet to pay off their debts. The problem is that some companies do not show obvious signs of financial trouble.

A customer with poor credit could rack up expenses from buying your goods but lack the assets to pay you back soon, if ever. Too many non-payments could put your company in a precarious financial situation.

Possible Signs of Poor Credit

Businesses usually find out if their customers have poor credit by running a check on their credit reports.

When you provide a credit application to another business, make sure you have included a provision to give you permission to pull up the credit report of the business.

You can then examine the report for red flags that tell you if your buyer is a credit risk. Here are three common examples.

1. A Poor Credit Score

Perhaps the easiest way to discover whether a customer has good credit is to look at the credit score.

Credit bureaus use the FICO or the VantageScore scales to determine a credit score, though the FICO scale is the generally preferred method of measurement. Here are basic benchmarks as dictated by the FICO score:

  • A very poor rating: 300-579
  • A fair rating: 580-669
  • A good rating: 670-739
  • A very good rating: 740-799
  • An excellent rating: 800-850

2. Excessive Debt and Late Payments

A credit report should give you a rundown of current and past debts accumulated by your customer as well as payment histories on those debts.

Too many late payments can indicate a possible credit risk.

Additionally, your customer may have incurred a substantial amount of debt, which means your buyer might lack the money to cover payments to your business.

3. Financial Judgements and Bankruptcies

A credit report can also alert you to financial claims and insolvencies your customer has experienced, such as bankruptcy or foreclosures.

You may also learn that your buyer is under a lien or has incurred a costly civil judgement. Such entries could indicate poor business decisions and management.

At least, they may show that your customer probably will not have the money to pay you anytime soon.

Discover a Credit Risk With the Right Resources

A credit check of your customers may alert you that a business will struggle to pay off a line of credit.

PencilPay offers a digital platform that allows companies to pull up a credit report on their customers and find out whether a possible buyer has a low credit score and multiple outstanding obligations.

Learn how these services can help you identify a company as a possible credit risk.