3 Quick Business Credit Report Red Flags to Avoid Bad Debt

3 Quick Business Credit Report Red Flags to Avoid Bad Debt

Extending credit is a requirement of doing business today. This necessity unfortunately opens you up to credit risk and the potential for bad debt.

While you may not avoid all credit risk, credit managers are able to greatly reduce their likelihood of a collection account or bad debt by pulling a business credit report.

Good credit managers are able to read a credit report to understand how a company has historically paid their bills. Great credit managers are able to use a company's credit report to predict how they can expect to be paid.

Within the report, are red flags that these great credit managers look for to avoid bad debt.

The 3 Bad Debt Red Flags on a Business Credit Report

Knowing how to read a business credit report is a requirement of any good business credit professional. It is the great ones that are able to use a report to avoid the likelihood of bad debt.

Here are 3 red flags that they look for to reduce their credit risk.

1) Low Business Credit Score

Business credit scores give you an idea of a company's risk potential. Each business credit bureau has their own scoring system, but the scores are usually calculated based on factors in the following four areas:

1. Payment history


2. Current level of indebtedness


3. Current level of delinquencies


4. Length of credit history

Each bureau will tell you what range of scores they consider high risk. On an Ansonia Business Credit Report, a risk score of 70 or lower is considered high risk.

A low score is not cause to deny a company credit on its own; use your judgment here. If the company has a low business credit score and other adverse information on their report (such as flags #2 and #3 below), you are probably better off working with them on cash terms.

2) Credit Alerts

Credit alerts are never a good sign. Ansonia's are displayed in bright red, hoping to literally "alert" our customers of the adverse information.

The severity of the credit alert can range greatly, from a bankruptcy to a slow pay.

While this is not a hard and fast rule, alerts can be grouped into two categories: approach with caution and approach with EXTREME caution (creative right?)

Approach with caution

• On cash terms


• Slow pay


• Phone disconnected


• Returned check

These are often early warning signs. For example, if a company is starting to have cash flow issues, you might see a "slow pay" or "on cash terms".

It is important to note that alerts in this category can sometimes be explained:

Slow pay - possibly a billing error

Phone disconnected - the company just moved offices

Regardless, approach these with caution; an alert is still an alert.

Approach with EXTREME caution

• Bankruptcy filed


• Fraud account


• Credit revoked


• Judgment filed


• Write-off


• Collection Account

Can you imagine if your company had one of the above alerts posted on your company credit report? These are big, bright, flashing red flags. They almost always indicate that a company is in trouble.

If one of the above alerts is present, cash terms are recommended over extending a credit line.

Credit alerts are never good. Regardless of its severity, an alert is always cause for further investigation. They are the cause of a lot of bad debt and write offs. When you see one, be careful.

See a full list of Ansonia's credit alerts here.

3) Increasing Days to Pay and an Abnormal Number of Credit Inquiries

One of the best early warning signs on a company's credit report is an increasing number in a company's days to pay. This increase is especially worrisome if it is coupled with an abnormal number of credit inquiries (the number of times a business credit report has been pulled).

What is an abnormal number? Look for a trend here. For example, a company has consistently had 4 inquiries on their credit report, and in the most recent two months has had 12 inquiries.

The combination can often signify that the company is in trouble. It often means that they are having trouble paying their current creditors (increase in days to pay) and are out looking for new creditors (abnormal number of credit inquiries).

Pulling a business credit report before extending a credit line can drastically decrease your credit risk. There are many things to consider on a report and these three are some of the worst in terms of risk potential. Avoid them and you can greatly reduce your chances of taking on bad debt.