Making informed decisions in commerce requires a clear understanding of a counterparty’s financial health. A company’s capacity to manage debt and meet its obligations directly impacts potential partners, suppliers, and investors. Business credit reports provide an objective measure of this financial stability, offering insights beyond a simple balance sheet review. This guide provides a practical, step-by-step framework for running a credit check on a business entity.
Why Business Credit Checks Are Essential
Conducting a business credit check is essential for commercial due diligence, reducing exposure to financial uncertainty. Understanding a prospective client’s payment history mitigates the risk of non-payment on extended trade credit or services, safeguarding a company’s cash flow and operational stability.
The reliability of a supply chain depends on the financial strength of its participants. Checking a supplier’s credit profile helps ensure they can maintain operations and fulfill long-term contracts. When evaluating a merger, acquisition, or strategic partnership, a credit check provides an impartial assessment of the target company’s financial commitments and liabilities before entering into binding agreements.
Key Information Needed Before Running a Check
Running a credit check requires gathering specific, accurate identifying information about the target company. The full legal business name must be confirmed, as slight variations can lead to pulling the wrong entity’s file or receiving an incomplete report. A current physical address, including the city and state, is also necessary to narrow the search parameters.
The most reliable identifier for a business is its Employer Identification Number (EIN), which is the corporate equivalent of a Social Security Number. Supplying the EIN improves the precision of the inquiry, ensuring the resulting credit file belongs to the intended entity. Without this data, the credit reporting agency may be unable to locate a file or may return ambiguous results.
Primary Sources for Business Credit Reports
Commercial credit information is consolidated and sold by three major reporting agencies, each maintaining vast databases of corporate financial activity.
Dun & Bradstreet is recognized for its proprietary D-U-N-S Number system, used globally to track and identify businesses, and collects data on payment experiences across many industries. Experian Commercial Services provides reports featuring proprietary scoring models, drawing heavily on public records and trade line data submitted by creditors. Equifax Business utilizes a substantial database that leverages information from financial institutions and commercial suppliers. Because each agency sources data differently, a company may have varying file depths and distinct scores across the three platforms.
Step-by-Step Process for Obtaining a Report
Obtaining a business credit report starts by establishing an account on the chosen reporting agency’s platform. This involves providing basic organizational information and agreeing to the terms of service for purchasing commercial data. Once the account is active, the user navigates to the report inquiry interface.
The user then inputs the target company’s identifying information, prioritizing the legal name and EIN to ensure a precise match. After the company is located, the user selects a report level, which ranges from basic snapshots to comprehensive, in-depth analyses. Selecting the appropriate level depends on the depth of analysis required. The final step is purchasing the selected report, which is usually delivered electronically.
Deciphering the Business Credit Report
Understanding the raw data in a business credit report requires interpreting several distinct sections, starting with the predictive scoring models.
Scoring Models
Dun & Bradstreet’s PAYDEX Score operates on a scale from 1 to 100, where a higher number indicates a greater likelihood of prompt payment. Equifax uses a Payment Index that similarly reflects payment habits. Experian’s Intelliscore Plus synthesizes various data points to predict risk on a scale of 1 to 100, with lower scores indicating higher risk.
Trade Payment History
This section details the business’s actual performance in paying its suppliers. It itemizes “trade lines,” showing the credit amount extended, the payment terms, and the aging of the balance. Analysts examine the percentage of payments made within terms and the number of days beyond terms a company takes to settle invoices. A pattern of slow payments signals potential cash flow strain.
Public Records and Filings
The public records section reveals legal and financial actions taken against the company. This includes tax liens filed by government entities and monetary judgments resulting from lawsuits. Uniform Commercial Code (UCC) filings are also listed, indicating that the company has used assets as collateral for financing.
Firmographics
The firmographics section provides context about the company’s operational stability. This includes details like the date of incorporation, the company’s industry classification, and the reported number of employees.
Assessing Small or Private Companies
Assessing small or newly formed private companies can be challenging because they often have a thin or non-existent formal credit file. These entities may lack the payment history necessary for reporting agencies to generate a meaningful score or comprehensive report. When formal reports are insufficient, alternative verification methods must be employed to gauge financial risk.
One effective strategy is to request recent financial statements, specifically the Profit and Loss statement and the Balance Sheet. Analyzing these documents provides a direct view of the company’s current cash position, revenue generation, and overall debt structure. This offers a deep, current snapshot of financial viability.
Another step is to ask the company to provide bank references and trade references. Bank references confirm the nature of the banking relationship, while trade references are current suppliers or vendors. Contacting these trade references directly allows for manual verification of payment history and terms, providing real-world insight into the company’s payment reliability.