Editorial · July 26, 2015
Business Credit Report: How to Check a Supplier
A business credit report shows how a company pays its bills and what public records say about it. It is a fast way to check a supplier before a large order. It tells you only part of what you need to know to trust that supplier.
What a business credit report shows
Dun & Bradstreet (D&B), Experian and Equifax each sell these reports. Each says its reports can help check a supplier. In March 2015 D&B's site listed three online reports at $61.99, $121.99 and $151.99.
Reports differ by product. Equifax's list includes a company profile, a credit summary, public records, two risk scores and a 12-month payment trend. Experian's list includes key personnel, payment trends, bankruptcy filings, judgment filings and tax liens, plus credit inquiries made in the last nine months. D&B's Business Information Report lists a business summary and corporate relationships. It also lists payment history, financial statements, public filings, D&B ratings and credit limit recommendations. None of these lists mentions product quality or delivery.
How to read the scores
Equifax's report carries two kinds of score, one for late payment and one for failure. Equifax says its Business Credit Risk Score predicts the chance of a 90-day severe delinquency or a charge-off in the next 12 months. In plain terms, that is a very late payment or a debt written off as lost. Equifax's Business Failure Score predicts the chance of failure through what Equifax calls "formal or informal bankruptcy" in the same 12 months.
D&B's PAYDEX tracks how a company pays against its agreed terms. D&B's tables show average days to pay: a score of 80 is on terms, and 100 is 30 days sooner than terms. A 70 is 15 days beyond terms, and a 20 is 120 days beyond.
A risk score is a forecast, so read it as odds. D&B publishes the odds behind its Financial Stress Score, which predicts failure over the next 12 months. Of its classes 1 to 5, class 1 holds the highest scores, from 1570 to 1875. Class 1's average chance of failure is 0.03 percent. Class 5 holds the lowest scores, 1001 to 1339. Class 5's average chance of failure is 4.70 percent. Class 0 marks an open bankruptcy, a business no longer operating at its location, or another higher-risk situation. In these odds, failure means a firm stopped operating with a loss to creditors. From class 1 to class 5, the class number rises with risk while the score falls. Check which way a scale runs before you compare two reports.
Watch the trend, too. D&B tells sellers that, generally, a drop of 17 points or more in a customer's PAYDEX strongly predicts bankruptcy within 18 months.
What a report cannot tell you
An article on D&B's site says PAYDEX looks only at whether a business pays on time under its agreed terms. Work performance is a different question. The General Services Administration (GSA) publishes a guide for vendors seeking a Schedules contract, a route to selling to federal agencies. It lists a paid Past Performance Evaluation among the steps before a vendor submits an offer. For this evaluation, Open Ratings, a D&B company, surveys six to 20 past customers that the vendor names. The aim is to assess the vendor's work performance.
Reports can also have gaps. Experian says not all suppliers report to credit reporting agencies. Of more than 500,000 suppliers extending credit, it says, only about 10,000 report. Equifax names three kinds of source: payment data from lenders through a nonprofit exchange, payment records from suppliers, and public records. So a report with few payment records can mean few of a company's suppliers report, not that it pays badly.
A report can lag, and corrections take time. Equifax says the vast majority of accounts refresh monthly and a small number quarterly. It runs a dispute process, but only the business's owner or registered corporate officers can file one. Equifax says it typically gives the result in writing within 45 to 60 days after it gets the business's completed request form.
Match the report to the right company
Tie the report to the exact business, not just a name that looks right. D&B gives each physical location a D-U-N-S number, a unique nine-digit number. Ask your supplier for the number for the site you buy from, plus the supplier's legal name and the site's address. Then check them against what the report shows.
A D-U-N-S number is also used in federal contracting. GSA's Schedules guide calls the number, managed by D&B, "a widely accepted, unique identifier for companies around the world". It says a vendor needs the number before any other registration. D&B's site says a business can request a D-U-N-S number for free.
Checks to add before you order
Our editors suggest asking for current financial statements and trade references. A trade reference is a business the supplier deals with regularly. You can contact that business to check the supplier's creditworthiness. D&B tells sellers that the best data for credit decisions comes from financial information. It says the second best comes from trade references. Then call two or three of the supplier's customers about delivery and quality.
For a large order, consider a report from a second credit reporting agency as well. If a supplier or lender that a business deals with is missing from that business's report, Experian says, that supplier or lender most likely does not report to Experian. A second agency may hold records the first lacks. Equifax keeps a purchased report in your account for 30 days, so save or print a copy for your purchase notes. If a report and the supplier's answers do not match, slow down and ask why.