Businesses get credit scores, just like individuals, which show whether they are a good risk to give credit to. As with individual credit scores, these are calculated by Credit Reference Agencies, and they are based upon factors such as historical payment performance, public record information, company filing history, and comparative data within a company’s industry.
Businesses with a good credit score are at a lower risk of defaulting on any payments they are due to make, whereas those with a lower credit score carry a higher risk of defaulting on payments.
For businesses it isn’t an indicator as to whether you should trade with them or not, but rather an indicator as to HOW you should trade with them, with the basic premise being that you take steps to reduce financial risk to your business if trading with companies that have a low credit score.
You can do this by not extending credit to them, asking for payments up front, or reducing payment periods to just a few days rather than a month or more, with the aim being get paid sooner, in case they encounter financial difficulties.
At CreditHQ, we convert this credit score into a credit indicator which uses 1-10 scores and colours to indicate high (red), medium (orange), or low (green) risk.
If you know the level of risk then you are able to make decisions on when to chase debt, what credit terms you can offer this company, or how you can adjust should this company cease trading.
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