Not every supplier is a good supplier. Especially if they experience difficulties with liquidity. This is why you should always check the credit rating of future suppliers in advance, in order to avoid becoming the victim of a more or less insolvent company, or even a fraudster.
What the credit rating says about the supplier
Creditworthiness is basically the will and ability of a debtor to settle their debts. In this context, creditworthiness includes both the availability of financial resources and the willingness to meet payment obligations on a regular basis. A supplier’s credit rating therefore reflects their creditworthiness.
Credit rating is a commonly used term in the bank-lending business. It is used as the basis for deciding whether a customer is creditworthy or not. Landlords also check the credit rating of tenants before entering into rental agreements. In a business environment, credit checks are carried out on suppliers to ensure that they are willing and able to pay their bills.
Checking creditworthiness: The importance of the credit check
Credit checks are an important part of supplier management. By augmenting your own internal company data with extensive corporate data and industry-specific financial information from credit agencies, you get a comprehensive picture of the financial strength of your supplier. This provides the security for a stable partnership, which will not be negatively affected by sudden insolvencies or other financially dependent factors on the part of your supplier. From a strategic point of view, continuous credit checks of existing suppliers can be used as an early warning system.
How to determine the creditworthiness of a supplier
Credit agencies such as Experian, Equifax and TransUnion collect and store data from private individuals and companies. You can query this data and thus get an overview of the creditworthiness of your supplier. By querying one of these credit agencies, you will receive the supplier’s creditworthiness index with an appropriate explanation and an assessment of the probability of default, as well as further information and analyses.
When a credit check is worthwhile
Corporate credit checks cost money. Given these costs, the legitimate question arises as to when and how often a supplier’s creditworthiness should be checked. In general, the higher the invoice amount or order value, the more important the credit check is. You don't necessarily need to check every supplier, but you should err on the side of caution for larger orders. And if you have not worked with a supplier for a long time, maybe even several years, you should check their creditworthiness again. In this context, consult other companies to see whether the supplier may be experiencing financial difficulties.
Checking creditworthiness: Where does the credit agency data come from?
For credit checks, Experian uses data that it receives from trusted data partners, many of whom it has worked with for many years. In addition, the London-based company uses government sources, publicly available data and market research data.
Equifax has one of the largest and most extensive sources of consumer and commercial data in the UK. It uses this data to find common characteristics and build highly predictive scores.
TransUnion obtains data from sources such as advertising partners, banks/credit unions, collection agencies, credit reporting agencies, data brokers, financial technology companies, government entities, insurance carriers and marketing companies. It combines this data with its suite of software and analytical capabilities to help businesses and consumers make more informed, confident decisions.
For credit checks, Crediva works with data from local councils, the Registry Trust and the Insolvency Service. In addition, Crediva uses entries from Financial Sanction, Politically Exposed Persons and Death Register records.
Creditworthiness rating: The score value
The so-called score value is a credit rating and predicts the probability of a payment default. The higher the score value, the higher the calculated repayment probability. A low value, on the other hand, can be a sign that payment defaults have occurred in the past. Probably the best-known score value in the UK is the Experian Credit Score.
NB: a credit check is only one important component of supplier management. A comprehensive supplier evaluation is essential in order to systematically assess both new and existing suppliers in a manner that is tailored to your company requirements.