Commercial credit reporting

Commercial credit reporting is the maintenance and reporting of credit histories and risks for commercial companies.

While most people are familiar with consumer credit reports many are unaware that a similar reporting system exists to assess risk in extending loans to businesses, insuring businesses, underwriting insurance risk, purchasing businesses, investing in businesses and most of all in shipping goods to business on credit terms. Government departments are also large users of commercial credit for regulating businesses and in collecting taxes.

Every country in the world has commercial (or mercantile) credit reporting agencies, if for no other reason then to allow foreign exporters to asses the risk in shipping goods to a wholesaler in that country. They can be large public corporations like U.S.A. headquartered, Dun & Bradstreet Inc. (traded on the New York Stock Exchange, established in 1842) with thousands of employees and offices and correspondents around the world.^[1] A recent development in commercial credit reporting is Cortera – which combines data reporting comparable to Dun & Bradstreet , but which also runs an online community in which businesses put up online ratings on if/how/when they get paid by their own customers and suppliers (ratings visible to other community members.^[2] They can also be small one man operations serving a limited number of local and foreign clients in a small country.

Before telephones and the internet, the only way to gather risk information on a business was to visit the business owner at their place of business. Credit reporters would ask the owner for the names of the companies that supplied them on credit terms, what banks they dealt with and detailed questions about number of employees, what was sold, etc. They would then contact these suppliers and banks for reference information. It took days, even weeks, to fulfill a request for a commercial credit report.

Electronic communication and computers changed the gathering of commercial risk information. Credit reports can now be compiled in seconds without human intervention and without a business owners knowledge. Suppliers are now requested to supply frequent aged trial balance down loads on all their accounts receivable to commercial credit reporting agencies. These trade payment experiences are linked together to give a profile of how a business is paying numerous suppliers. Collection agencies supply the credit reporting agencies with information on commercial collection claims they receive which are matched to the trade payment experiences.

Public record information such as, bankruptcy filings, legal suits, lease registrations and judgments are also gathered and added to the files on a particular business. As this flood of information accumulates over many years trends are identified and it becomes like a pulse tracking cash flow within a business. Companies unable to come up with sufficient cash to pay suppliers are quickly identified. Computerized monitoring systems tell suppliers when to restrict credit to unhealthy businesses. These very comprehensive, detailed reports, can with mathematical equations be reduced down to two digit scores that now allow for automated credit approvals and rejections.

Commercial credit is more volatile than consumer credit. Few businesses survive five years in the same form that they were first founded. All businesses are in constant competition with other businesses for clients and markets. The granting of credit by businesses is very much a market driven. Retailers hope that they will have sold the goods they bought at a profit before they are required to pay for these goods that they bought on credit. Retailers who can not get credit from suppliers are at a serious competitive disadvantage if they are required to pay for their inventories in cash on delivery.

Strict laws governing consumer credit reporting agencies rarely include commercial credit reporting agencies. Any complaints about the accuracy or incompleteness of information in a commercial credit report can potentially do harm to the agencies reputation, so they do take complaints seriously. However, unlike consumers most businesses are oblivious to the risk reports being compiled on them. They may never be aware of why they were unable to obtain credit from a supplier. Suppliers are not required to provide credit to customers. Since only about 20% of businesses subscribe to commercial credit reports it most likely a business that was turned down by one supplier will be able to find an alternative source of supply.

References

1. ^ Cyndia Zwahlen (December 6, 2007), A credit history can keep a lid on doubt, LA Times, http://www.latimes.com/business/smallbusiness/la-fi-smallbiz6dec06,1,760351.story 
2. ^ Jason Kincaid (September 24, 2009), DEMO: Cortera Measures Business Credit With Community Ratings, TechCrunch, http://techcrunch.com/2009/09/24/demo-cortera-measures-business-credit-with-community-ratings/.story 

• Credit Management In Canada by Robert W. Jackson and David H. Mapleton
• The Complete Canadian Small Business Guide by Douglas Gray and Diana G