Back To Basics: The Benefits Of A Corporate Credit Check In New Zealand
Businesses all over the world rely on credit for their day-to-day operations, and New Zealand companies are no exception. Without debt, the world economy would be a mere shadow of what it is now.
While debt makes the world go around, it does carry with it a significant amount of risk. And just as it provides the lifeline that keeps businesses going, it can as well be the poison that sees them decimated into bankruptcy. The ability to manage debt is therefore critical to any business operation that seeks long-term survival.
Credit checks for debt management
To help manage debt, in New Zealand and other world markets, a system of credit reporting has been set up to mitigate its risks.
Credit reporting involves the collection of debtor data and making it available – either in its raw form or in the form of reports and scores – to businesses that need the information for decision making. This information is collected and computed by entities referred to as credit reference bureaus (CRBs).
In addition to information provided by creditors to the bureaus regarding their debtors, CRBs also rely on other publicly accessible information from the judicial system and other registries to build credit profiles for both companies and individuals.
Using all this information, CRBs make calculations and present the information they have in a simplified way for decision makers. In the credit report provided by CRBs is a credit score. It’s this score that indicates to anyone interested in your creditworthiness i.e. your capacity to repay debt. A high score means you qualify for larger debt.
The benefits of corporate credit checks
A corporate credit check is the simple act of acquiring a credit report from a CRB about a particular company of interest. This report shows the general financial health of a company and its ability to take on new debt. This kind of information can prove invaluable to businesses looking to extend credit or lend out funds to other businesses. The benefits of corporate credit checks are:
1. Reduced risk of default. Whenever you’re conducting business on credit or lending money to a customer, there’s always the risk of default. Because business is not charity, it’s the creditors intent to get repaid when the debt comes due. Credit checks help reduce the risk of bad debt.
By conducting a credit check on prospect clients and would-be debtors, you can predict with a high degree of accuracy whether the company will pay the debt when it’s time to do so. A credit check reveals the history about how a company has been handling their debts.
Additionally, a credit check can reveal that a company is ailing and therefore not in a capacity to take on more financial responsibilities.
2. Better cashflow management. Profits are the heart of any business operations, but cashflow is the blood that keeps all the organs fed. Without a positive cashflow, your business will not be able to pay salaries, rent, pay suppliers or keep the operation going in any aspect. It’s critical to have positive cashflow if a business will survive in the short-term.
Conducting a corporate credit check is important to ensure positive and consistent cash flow for continued smooth operations. From the report of a credit check, you can tell with great accuracy whether a business you extend credit to will make their payments when it’s time to do so. The predictability provided by credit reports helps in financial planning which ensures that your coffers don’t run dry as you wait to be paid your dues.
3. Company valuation. If you’re interested in acquiring a particular business, then a complete rundown of its finances is important to determine its value. A good credit rating enables a company to access financing and credit and is therefore an asset.
For this reason, it’s important to find out the credit score of any business you’re looking to buy as this will influence its final valuation. A company with few assets and a great credit score might be considered to be more valuable than a company with many assets but a poor credit score.
A corporate credit check can also help identify any inconsistencies with the stated value of the company. If the books look good, but the credit score is appalling – this might be a huge red flag for fraudulent activities.
4. Credit terms formulation. The terms provided to debtors defer depending on their perceived risk. Borrowers who are good at managing their debts will, of course, get favourable terms while those with a poor debt repayment record will be penalised for their bad credit history.
By conducting a corporate credit check you get access to a company’s payments history. With this information, you can decide whether to lend or sell on credit to a prospect, the amount of time to allow before payments should be made, the interest to charge and whether collateral is needed to secure the debt.
5. Partner selection. If you’re looking for a partner to go into long-term business with, then checking out the credit rating of a prospect can provide valuable insight that will prevent nasty surprises down the road. For example, you don’t want to enter into a long-term agreement with a company that is about to go burst.
Similarly, if you’re looking for a partner to supply a certain product for a certain duration or to fill a particularly large order, knowing whether they have the capacity to do so is critical. A credit check will give you a peak into a potential partner’s finances so that you can make an informed decision on whether to go into business with them.
By performing corporate credit checks on businesses you plan to transact with on credit or lend to, you reduce the risk of bad debt while maximising your chances of getting paid on time. There’s no need to enter into business agreements blindly, a quick credit check can provide invaluable insight for informed decision making.