Sources of Credit Reports/Credit Report Components
|Unit 3.1- Sources of Credit Reports|
A Credit Report and Its Components
Commercial credit is an arrangement by which a buyer can take possession of something now and pay for it later or over time. A credit report is a tool used to convey whether an individual or company has any outstanding credit obligations and whether the payments for those lines of credit are current. Typically, credit reports are created by credit reporting agencies, like Dun & Bradstreet, for example. From a seller’s perspective, this is an external credit report. However, there are some instances when sellers or bankers need to create their own “credit reports.” Depending on the industry or the company, these internal credit reports may go by several different names or be considered part of the credit investigation and not called out specifically. For purposes of this module, “credit report” is used to describe a report created (either internally or externally) to convey outstanding credit obligations and payments made.
With this information, a seller can decide whether to grant credit to the buyer or not. A decision to grant commercial credit to a buyer means that a new or existing buyer has the opportunity to purchase goods or services on credit, or on a “buy now, pay later” basis.
But just knowing such doesn’t really paint a complete picture. So, you need to know what information is included in the credit report as another way of defining a credit report.
The components of credit reports include a history of the business; payment trends provided by other vendors (but reported anonymously); general bank information; public records of law suits; and, financial statement information on public companies or private companies when volunteered by the buyer.
The history of the business includes how long it has been in business, the form of the business (corporation, proprietorship, and partnership), background of the owners, and the number of employees. Some credit evaluators say that the longer a business has existed, the better likelihood it will survive. This is not necessarily true, but an important part of the history of the business is past (antecedent) information about the current management in terms of experience, education and the like.
Payment trends are gathered by credit reporting agencies, mostly when companies agree to submit payment history. The reporting agency assembles this data and reports, anonymously, the high credit extended, amount owing, amount past due, days taken to pay. This information is valuable to an international credit manager because if a report on a potential buyer indicates prompt payment trends to other vendors, it is likely (but never a sure conclusion) that a seller making the credit inquiry could be paid promptly.
Bank information as part of a credit report is important to a seller. Often if a buyer has a record of paying the bank its obligations (loans) on a timely basis, an international credit manager can see that the buyer may have the ability to pay trade or supplier obligations. The credit report will indicate, in many cases, the highest credit provided by the bank to the buyer, how much is currently outstanding in loans, if the loans are secured by assets, and the way the buyer has paid. An international credit manager should be careful, for example, if he/she learns that a sizeable checking account balance exists the day of the credit inquiry, It is quite possible that that balance could be gone the next day. The average balance in the checking account of the buyer gives a seller a sense of the cash available in a buyer’s account. Sellers should always be concerned with a buyer’s cash flow since it determines the ability to pay obligations as they mature.
Public records, including suits, judgments, bankruptcies, business acquisitions/changes that are recorded in state or federal agencies, give a seller an indication as to problems that a buyer made have had in the past. Often government agencies, both in the US and abroad, will provide information on the company being researched, with material provided according to the law of that country.
Financial information, such as the balance sheet, operating statements, and cash flow reports, are often provided on public companies; in many countries (like the US), this information is on record with the government. Private companies may elect to submit financial information but are not required to do so. It is important to remember that the financial records of international companies may look different, use different terminology and contain calculations that are all different from the standard accounting practices used in the US. These differences must be taken into consideration when analyzing foreign financial records.
Some reports are oriented towards specific industries and will provide specialized industry information that covers the specific product or service. For example, industry credit groups for giftware, forest products, and chemicals have their own members who submit information into an organization that compiles the data and provides payment histories, although not naming the members who submit the payment history to mutual buyers.