Credit Reports/Sources of Credit Reports/What is a Credit Report

What is a Credit Report?
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 (e.g., Dun & Bradstreet). From the seller’s perspective, this is an external credit report. However, there are some instances when a seller or banker needs to create their own “credit report.” 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, the 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 the statement above doesn’t really paint a complete picture. So, let’s consider what information is included in the credit report as another way of defining a credit report.

Components of Credit Reports
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, on public companies (on private companies when volunteered by the buyer), financial statement information.

History of the Business
The history of the business includes how long they have 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 antecedent information about the current management, in terms of their experience, education and the like.

Payment Trends
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 the 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 the seller making the credit inquiry could be paid promptly.

Bank Information
Bank information as part of a credit report is important to the seller. Often if the buyer has a record of paying the bank its obligations, e.g., loans, on a timely basis, this is an indicator to the international credit manager that they may have the ability to pay their trade or supplier obligations. The credit report will indicate, in many cases, the high credit provided by the bank to the buyer, how much is currently outstanding in loans, if the loans are secured by assets, and how the buyer has paid. The 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, since that balance could be gone tomorrow, so the average balance in the checking account of the buyer gives the seller a sense of the cash available in the buyers account. Sellers should always be concerned with the buyer’s cash flow as this determines their ability to pay obligations as they mature.

Public Records
Public records, including suits, judgments, bankruptcies, business acquisitions/changes that are recorded in state or federal agencies gives the seller an indication as to problems that the 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 Statement Information
Financial information, such as the balance sheet, operating statements, and cash flow reports are often provided on public companies and 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. This 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 such as 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).