Determining a Prospective Customer’s Creditworthiness

Industry Credit Groups
Deliver the Full Picture

What’s the most effective way of determining the creditworthiness of prospective customers?

The typical and quickest solution is to obtain a business credit score — a snapshot of a prospective customer’s financial responsibility and capacity to make timely payments. Ranging from 1 to 100 and provided by the reporting agencies Dun & Bradstreet, Equifax Business, or Experian Business, the score is calculated based on the company’s payment history, outstanding debts, credit utilization, and public records. A business credit score of 75 or higher is considered strong and usually constitutes the minimum requirement to qualify for a small business loan.

The Value of a Business Credit Score

Will a new customer pay you? And will they pay on time?

While you can never be certain about a customer’s behavior before that first transaction, a business credit score delivers as comprehensive a financial picture as possible to help you feel reassured about the prospect’s trustworthiness and creditworthiness. If the past is prologue, then a prospective customer’s history of payment habits will strongly indicate their future behavior.

Knowing a company’s business credit score can help you determine not only the prospect’s viability and reliability but also the necessity of taking steps such as requiring collateral or implementing stricter payment terms (including asking for a greater portion of the payment in advance) as part of the process of extending credit. Especially if you’re considering a customer with a business credit score of lower than 75, avoiding nonpayment or late payment could hinge on your adjustment of the credit terms to mitigate your risk.

Only a Snapshot

Although a business credit score provides a comprehensive financial picture, that picture is only a snapshot in time. It may not consider real-time developments affecting a company’s creditworthiness, as the information used to formulate the score could be about a year old.

Business credit reports rely not only on public records but also on data submitted by the businesses themselves — meaning that if the company in question misunderstood parts of the credit reporting process, the score and, consequently, the perceived level of risk associated with the business prospect might be inaccurate. According to a Wall Street Journal study, as many as one-quarter of business credit reports may contain errors or are missing key information.

Further, a business may have a credit score under 75 (or no credit score at all) simply because it’s a relatively new company, which isn’t necessarily a reason to dismiss the prospect’s creditworthiness summarily.

A Multifaceted Approach

Due to the potential pitfalls of evaluating a prospect solely based on a business credit score, your business would benefit from a more comprehensive and multifaceted approach to determining creditworthiness. That’s where industry credit groups enter the picture.

Industry credit groups are associations or organizations composed of businesses within a particular industry that collaborate to exchange credit information and evaluate the creditworthiness of their customers. The value of industry credit groups lies in the benefits they offer to participating businesses, which typically include:

Credit Information Sharing: Industry credit groups facilitate sharing credit experiences and payment data among member businesses. This information exchange enables participants to make more informed decisions about extending credit to customers and helps identify potential credit risks.

Risk Mitigation: By pooling their collective knowledge and experiences, industry credit groups help members mitigate the risks of granting credit. Businesses can identify patterns or warning signs of potential defaults or late payments through shared insights and analysis.

Benchmarking: Industry credit groups provide a platform for businesses to compare their credit practices and performance against industry peers. This benchmarking allows members to assess their credit policies, terms, and collection strategies, helping them identify areas for improvement and adopt best practices.

Networking and Collaboration: Joining an industry credit group offers opportunities for networking and collaboration with other professionals within the same sector. Members can connect with industry peers, exchange ideas, and discuss common challenges, fostering community and mutual support.

Access to Industry Expertise: Industry credit groups often invite industry experts, speakers, or consultants to share their knowledge and provide insights on credit management, risk assessment, and industry-specific trends. This access to specialized expertise can help members stay informed and make more informed decisions.

Enhanced Credit Management: Businesses can improve their overall credit management practices by participating in industry credit groups. They can gain insights into effective credit policies, collection strategies, and risk assessment techniques, leading to more efficient credit processes and potentially reducing bad debt.

Working With a Trusted Partner

While a business credit score provides a clear snapshot of a prospective customer’s capacity and likelihood to pay, the number can’t be taken at face value. It’s a shortcut to determining creditworthiness that’s undoubtedly tempting. But it’s a shortcut for a reason — because it may not be entirely reliable. Variables like the age of the business may lead you to dismiss a prospect stronger than a weak business credit score indicates. On the flip side, outdated and otherwise inaccurate reporting could mean that a strong credit score doesn’t tell the whole story about a seemingly appealing prospect.

Working with an industry credit group, however, means that you can navigate the process of determining a prospect’s creditworthiness with the expert guidance of a trusted partner — and attain a much more comprehensive and well-researched picture of the prospective customer’s viability.

Further, the opportunity to collaborate with other professionals through an industry credit group inserts a crucial human element into the process. Suppose you’re wary of making a significant business decision based on a number (like a credit score) generated by a computer. In that case, you’ll certainly want to conduct broader due diligence and explore the issue of creditworthiness with the assistance of experienced professionals — advisors who can ensure that you leave no stone unturned in evaluating a customer.

Ultimately, a business credit score gives you a hunch, but working with an industry credit group delivers a comprehensive assessment you can trust.

Sources:
Featured Image: Adobe, License Granted
U.S. Small Business Administration
Synovus
Allianz
Dun & Bradstreet