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How much risk do you take? Or asked another way: Who receives a credit from you and who doesn't? This is exactly the question where creditworthiness is decisive. It's what the business world revolves around. Because the better the creditworthiness of your customer, the more reliable and faster he will settle his debts with you. So it is not about trust, but about not taking pointless risks. But how is the creditworthiness of a company defined? Who will provide information? And how do you manage to improve your own creditworthiness? You will find the answers to these questions in this article.
Have you experienced it before? You deliver something to a customer on invoice - and then he doesn't pay. This is incredibly annoying and in bad cases even threatens the existence of SMEs. He already is in full possession of the goods that you have made available to him on a credit basis. This is also known as supplier credit. At the same time, you are losing cash - cash that you urgently need.
Getting your well-deserved money can be very tedious and exhausting. You don't even have the certainty that you won't end up empty-handed. Your customer may find himself in financial difficulties, and in extreme cases insolvency may be a risk or even occurs.
What if you just recognise the black sheep before the transaction and do no business with them at all? This is exactly what the credit check promises. It ensures that you only do business with reliably paying and financially stable companies. This not only prevents payment delays, but also the costly dunning of defaulting customers. This in turn makes resources available for more important tasks such as the active Cash Flow Management and your superiors will certainly be not so pushy with annoying questions about outstanding invoices.
You for sure check your business partners very accurately when you do business with them for the first time. But even afterwards you have to constantly monitor them and take measures if either the creditworthiness deteriorates or improves.
This has a direct impact on the information you collect for the credit check. Logically, you do not know new customers. Therefore you are depending on external sources. These can be obtained from a credit bureau. You already know more about your existing customers or suppliers. You make your own experiences, which you take into account when making credit decisions. But don't just rely on your own internal sources of information. It's dangerous under certain circumstances. It is imperative to permanently monitor your portfolio and use external sources.
When you combine internal and external information, you get a complete picture of your business partners. Internal sources are accounting, sales, customer service, etc. External sources are - as already described - specialised credit bureaus, but also media reports, official publications, the internet, etc.
Let’s examine external sources in more detail. They come from credit bureaus. These are specialise in collecting information about companies, consolidating it and making meaningful and easy to understand scores and ratings available.
When you check a company, you know whether it is financially strong and stable - and that with a high probability. An important part of this assessment is the payment experience. The better a company has paid its invoices so far, the better its rating will be.
Credit checks show even more. The most important information is the financial strength, the credit recommendation (to determine the credit limit) and the risk of a loss. If you are familiar with the different scores and ratings and know how to read them, you will quickly and reliably assess a company. This applies both to the initial review of a new business partner and to the monitoring of existing customers and suppliers.
For new customers you pay more attention to indicators such as company history, industry, years in business, owners, shareholder structure, etc. A thorough examination may reveal information that excludes a partnership from the outset.
Let's get back to checking new customers. There are other so-called "red flags" which exclude cooperation from the outset. These include, for example, many debt collections, massive payment delays or open wage payments. If you even hear about it from the media, then you have to be very careful. Only supply these companies against advance payment or obtain payment guarantees.
But who ultimately decides whether a deal is made or not? The available information is not always as clear as one would like it to be. There are also internal conflicts of interest. The sales department wants to make turnover, but you as the CFO have the overall risks in mind. Therefore, regulate aspects such as credit limits, payment terms or exclusion criteria in your credit policy.
In this way, you always view the checking of individual companies in a larger context. It is not about individual decisions, but about the sum of all debtors and the portfolio with its risks. All this information forms the framework within which you make the right decisions - well-founded, transparent and secure, and always with reference to the total risks you are willing to take.
It gets even better: Not only do you minimise your risks, you also recognise slumbering potentials with customers. If there are such in your portfolio, then it is time to do more business with them.
Creditworthiness is not only about checking business partners, but also about the opposite direction. Your suppliers and customers will check you just as you check them. That's why you don't get around always keeping an eye on your own creditworthiness and maintaining it meticulously.
We have 3 tips to help your business partners recognise you as creditworthy.
1. Order a self-disclosure
Do you know your own creditworthiness? So what other companies see about you? If not, it's time to find out. Contact a credit bureau and order a self-disclosure. You're even entitled to it.
2. Deliver positive information
When calculating creditworthiness, credit bureaus proceed according to the principle of prudence. This is especially true when there is little information available about a company. This usually leads to a worse creditworthiness score.
To improve your creditworthiness, deliver as many positive information as possible. Avoid debt collections, pay them on time and provide clean information on your financial and employee figures.
3. Actively manage your cash flow
If you do not have enough cash at your disposal, there will be payment bottlenecks and delays. Your business partners will notice that. Their creditworthiness deteriorates, they therefore receive less credit and therefore have even less liquid assets - you are caught in a vicious circle.
To escape it and improve your cash flows, follow these 3 tips.
Also reduce your collection period, the so-called DSO (days sales outstanding). Basically the following applies: The earlier your customers pay, the better. Another way to improve liquidity is to increase the days payables outstanding (DPO). But do not strain the patience of your suppliers too much. This may have a negative effect on your creditworthiness. You will then receive credits at much worse conditions.
For a full understanding of D&B Business Credit Reports, please download our white paper. You will find the scores described in detail - including screenshots.