Reading a Business Credit Report
Each business credit bureau has their own way to represent the credit information they collect. While the layout might vary, or the names for different sections change, the principles outlined below are the same.
If you would like a free sample business credit report to follow along with, click here.
Step 1) Read the Company Profile
First thing first! Check the company profile to get an overview of the company you are looking at.
The company profile will contain information like:
- Company name
- Address
- Telephone and fax numbers
- Information on company principals
Don't spend too much time here. The most important thing is to be sure that the report you pulled is on the correct company. Match the company name and address to what you have on file. This is especially important if the company you are considering extending credit to has a generic name (like Smith Enterprises).
Step 2) Translate the Business Credit Scores & Credit Alerts
Towards the top of each business credit report, you will find an overview of how the company pays their bills.
Each business credit bureau has their own way to represent this overview but it will usually contain three important criteria: a credit rating, a business credit score, and a list of credit alerts.
Credit Rating
We're back to dreaded 74K-38. So what the heck does it mean?
74K = $74,000 - This is Company XYZ's average monthly balance over the past 6 months.
38 = 38 days to pay - Over the past 6 months, they pay on average, in 38 days.
To put this all together, a rating of 74K-38 would mean over the past 6 months, Company XYZ has had an average monthly outstanding balance of $74,000 and pays their bills in roughly 38 days.
Business Credit Score
Business credit scores give you an idea of a company's risk potential. They range from 0-100; the higher the better.
A sophisticated mathematical model calculates the scores based off multiple factors in each of these four areas:
- Payment history
- Current level of indebtedness
- Current level of delinquencies
- Length of credit history
Our business credit scores are grouped into three categories of risk:
Credit Alerts
A credit alert is an adverse piece of information. We show our credit alerts in bright red, hoping to literally alert credit professionals of their existence. Examples of credit alerts are:
- Collection accounts
- Judgment filed
- Fraud account
- Credit hold
- Returned check
- Phone disconnected
Alerts are never something you want to see when considering extending credit to a company. If you encounter a company with a credit alert on their report, proceed with caution.
Credit alerts, ratings and scores are useful in making a credit decision, but the majority of your time should be dedicated to the next two steps.
Step 3) Understand Month by Month Payment History
How is a company currently paying their bills? Are they slowing down on payments?
This is the start of the meat of a business credit report. Here you will see actual payment history that has been reported by businesses who are working with Company XYZ. This data is usually shown in the standard accounts receivable aging buckets (as seen below).
Using January of 2014 as an example, 28 companies reported their credit experience with Company XYZ. Those 28 companies were paid by Company XYZ in roughly 43 days.
There are a few basic things to remember when analyzing this section:
- The more money that is in the 1-30 day aging bucket the better.
- The past 12 months of payment history are the most important. I am much more interested in how a company pays their bills now vs how they were paying 2-3 years ago.
- You should be able to see how many companies have reported to your business credit bureau each month. If you do not have this transparency, there is no way to know whether the information you're viewing was reported 3 months ago or 3 years ago.
Step 4) Determine How Your Industry is Paid vs How All Industries are Paid
This is an extremely important section. Here you will see how Company XYZ pays different industries.
When looking at industry specific payment history, there are two key considerations:
- How is your industry being paid? This is the best indication of how you will be paid.
- How are all other industries being paid? An often overlooked area, but vital in determining credit worthiness.
Use the same logic as you did with numbers 1-3 in Step 3 above - majority of the bills in the 1-30 day aging bucket, information from the past 12 months, transparent data.
Step 5) Check the Number of Credit Inquiries
Similar to your personal credit report, business credit bureaus track the number of times a company's credit report has been pulled.
A business credit report having multiple inquiries is not always cause for concern. In many instances, it can even be a postive sign. Here are a few examples:
To determine whether inquiries are good or bad, review the company's days to pay. If these have been steadily increasing over the past few months, it could mean that they are having trouble paying their bills.
Step 6) Put it All Together
Consider all that you have learned about Company XYZ's credit worthiness. Does their credit report contain any red flags? How quickly can you expect to be paid? Can you wait that long?
A strong business credit report is one of the best weapons in a credit professional's arsenal. Understanding the information they contain will dramatically increase the likelihood of payment.
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