All businesses have a responsibility to avoid dealing with fraudulent suppliers, stakeholders, and customers. That’s why gaining insight into their creditworthiness before signing an official contract is very important.
Unpaid bills and late payments are on the rise, and most businesses are aware of this dangerous trend. In a recent survey involving business professionals, 43% of respondents reported experiencing at least one instance of supplier payment fraud. Should businesses stop providing credit to suppliers and customers? They can’t because the sustenance of many B2B companies are based on extending credit.
Inconsistencies in payments affect these businesses’ performance levels. Their cash flow is ruined, and so is their ability to plan for future orders. Supplier fraud can take place in various ways:
- Suppliers make low-value orders from multiple fake customer accounts to compel businesses into ordering a lot of stock. Once they receive payments from the business, the accounts become inactive, or the orders are canceled.
- Fake customers and suppliers often conspire to steal from businesses. They pressure businesses to purchase stock from untrustworthy sources and disappear after executing the fraud.
- Suppliers promise to send products after accepting business credit but disappear on the delivery date.
Businesses looking to avoid delivery delays suffer the most when their one-off suppliers don’t deliver on their promises. The consequences of such uninterrupted services have to be faced by the business. They may lose their market reputation.
That’s by offering credit to suppliers or customers based on their creditworthiness is extremely important. To be sustainable, businesses must extend credit to suppliers/customers who can pay it back. The challenge is figuring out their creditworthiness.
Obtaining Financial Information on Business Partners
A recent survey revealed that 72% of businesses don’t know how to check their business affiliates’ credit scores. It’s shocking to see so many businesses not being aware of the risks they face. Thankfully, they can obtain business reports from trustworthy credit bureaus like Dun & Bradstreet (D&B), Credit-safe, or Experian.
However, these basic reports don’t provide high-level analyses of how other businesses intend to pay their bills and the likelihood of staying in business until the repayment date. Each of these credit bureaus provides slightly contradictory information. To truly learn how to check business credit score, businesses have to team up with third-party credit assessment companies that can provide extensive analyses of business facts, including information such as:
- Business identity (Website, tax ID number, etc.).
- The financial stability risk score and the risk of non-repayment.
- Recommendations on how much credit should be extended based on their previous delinquencies in payments.
- Pejorative legal filings.
- Instances of the organization/individual being reported for fraud.
- Past bankruptcies.
- Court judgments.
Such reports help businesses gain detailed insight into their business partners’ business identity, legal standing, and ability to return the money they borrow. These reports can also help businesses:
- Prioritize fast-paying suppliers and customers and create more reliable cash flows.
- Make accurate loan and credit decisions after determining the likelihood of receiving timely repayments.
- Extend favorable trade terms to reliable customers. Customers with high business credit scores instill confidence in lenders.
- It becomes easier to engage in business with other entities, be it suppliers, customers, or other businesses. Entering into business agreements with organizations that have clean track records and high business credit scores can help both parties flourish.
Businesses that use data-based approaches to extend credit makes businesses are likelier to receive capital from venture capitalists. These professional investors know everything about the financial histories of the companies they invest in. If they discover that a business is extending credit to unworthy suppliers or customers, they’re less likely to invest.
Monitoring Existing Customers and Suppliers
The great thing about getting detailed business credit reports is that they can even be used to assess existing business partners. It can be challenging to oversee the credit activities of all customers and suppliers at all times. But, business credit reports offer one-page summaries of their financial and legal statuses. Getting these reports regularly enables businesses to act quickly when one of their partners’ financial status is in jeopardy.
These reports also discuss the payment performances of target suppliers or businesses. It’s easy to discover how much time these organizations take on average to pay their bills or repay their loans.
For large businesses, processing vast amounts of credit information from multiple sources is extremely difficult. Thankfully, business credit and risk management companies can combine the data they receive from their own research and retrieve major credit bureaus to offer comprehensive reports.
By using these reports, businesses can set up ‘early warnings systems’ and avoid doing business with unreliable business partners. More importantly, they can target customers and suppliers who are likelier to become fast-paying partners. By doing so, businesses can keep extending credit and create reliable cash-flow systems.