What to look for in a commercial credit report
You want background credit information on a business prospect, so you turn to a commercial credit report. When the report doesn’t raise any red flags about the company, you decide to go ahead and start doing business with them.
The risk of loss is significant if your new customer doesn’t pay their bills, but at the end of the day, you figure the report would have warned you of anything untoward. But would it?
There are commercial credit reports for a full range of business sizes, risks and purposes, but it’s the premium report that businesses use when a comprehensive credit risk evaluation is required. It’s assumed the report will warn of all relevant signs of risk, but unfortunately, this isn’t always the case. If the aggregate data used in the report comes from a limited number of sources, vital clues about the company’s financial health might go unnoticed.
To tell if a report is up to scratch, look at the coverage and depth of information. Ask for a list of sources and find out the size of the database used. Business data from the Australian Securities and Investments Commission (ASIC) should be supplemented with other sources. When used alone, it’s unlikely to provide a comprehensive enough view of credit risk.
If your customer credit check is for a high-risk business decision, then it’s in your best interests to ensure your report contains absolutely everything there is to know about the company, its directors and all associated relationships, says Michael Criss, Head of Commercial at Equifax.
Does your report include information about the people behind the business?
“How can a credit report, used for high-risk decisions, give an adequate assessment of credit risk when it includes only business data? What about the people behind the company – the behaviour of individuals can reveal a lot about the risk of financial instability”, says Criss.
When a report states it includes director and shareholder details, this could mean anything, he warns. “It might only look at litigation activities against the directors and not drill down any deeper. The director mightn’t be linked to a failed company, but that doesn’t mean he hasn’t been involved in other dishonest dealings.”
“In pulling together a picture of the person behind the business, it’s crucial to use a broad range of data points.”
When a deep level of insight into the validity, financial stability and performance of a business is required, the data used in the report needs to be broad enough to look at discrepancies between sources. Information about the commercial and consumer profiles of company directors, for example, are crucial for forming a complete picture of potential risk. It’s by joining the dots on a myriad of information about the trading history of the company, its directors and its shareholders that warning signs might appear.
What can go wrong if your report isn’t comprehensive
To illustrate what can go wrong when a ‘premium’ report lacks substance, Criss shares the story of a client who lost $100,000 when his customer failed to pay.
“It wasn’t until the client lost all the funds that he contacted us to look into the customer’s trading history. Even though he had previously used another supplier’s credit report, it had not thrown up any red flags. When we ran our in-depth trading history report, it was quite a different story. Lots of different activity, issues and concerns showed up around the company’s director.”
Criss explains that one of the curious insights was a discrepancy in the director’s driver licence number. The last two digits of the licence were different on some documents, yet this was never revealed in the original report.
This same person had multiple identities on the commercial and consumer credit bureaus. He was the director of several companies that were created and changed across numerous sectors all within a short space of time. And when examining his credit activity in conjunction with his other behaviour, there were several question marks which should have been raised in the original report.
“This client found out the hard way what can happen when a so-called comprehensive credit report doesn’t supply you with all the facts,” says Criss. “They were doing the right thing using a credit report to work out whether their customer was a good or bad credit risk. Little did they know the report would let them down.”
Equifax Commercial Credit Reports are unmatched in the market for their broad coverage and depth of information. We are the largest provider of ASIC company and director search information in Australia, and as such, we draw on a rich data set. As Australia’s largest commercial and consumer credit bureau, our data sources are extensive – we have the largest database of its kind in Australia, boasting more than 19.4 million credit-active individuals, 3.6 million businesses and companies and 3.4 million sole traders.
To find out more, speak to your Equifax Account Manager or email us.
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