Commercial credit reporting
Encyclopedia
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. 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. 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.
While most people are familiar with consumer credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
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
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
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
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
like U.S.A. headquartered, Dun & Bradstreet
Dun & Bradstreet
Dun & Bradstreet is a Fortune 500 public company headquartered in Short Hills, New Jersey, USA that provides information on businesses and corporations for use in credit decisions, B2B marketing and supply chain management...
Inc. (traded on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, established in 1842) with thousands of employees and offices and correspondents around the world. 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. 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
Credit history
Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy...
.
Electronic communication
Telecommunication
Telecommunication is the transmission of information over significant distances to communicate. In earlier times, telecommunications involved the use of visual signals, such as beacons, smoke signals, semaphore telegraphs, signal flags, and optical heliographs, or audio messages via coded...
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
Trial balance
A trial balance is a list of all the nominal ledger accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value...
down loads on all their accounts receivable
Accounts receivable
Accounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
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
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.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
Cash on delivery
Collect on delivery is a financial transaction where the payment of products and/or services received is done at the time of actual delivery rather than paid-for in advance...
.
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.