The importance of checking credit on the companies you do business with (and how to do it)

Let’s start with a story that’s frustrating, true, and all too common.

Gerri is a independent consultant with years of experience. One day, she’s introduced to a potential business partner (let’s call him Mike) through a friend. Mike publishes information for the mortgage industry, and is interested in developing a credit training program for loan originators. Gerri and Mike decide to work together, and agree that Gerri will write the program, Mike will market it, and they’ll split the proceeds 50/50.

Gerri works hard and delivers the program. Mike begins the marketing process, and reports back to Gerri that her program is being well received and that she’ll be getting a check for $10,000 for the initial sales, with more to come as sales continue and sales objections are handled. But the check never comes. Mike assures Gerri that all is well, and asks her to wait just a few more days. So she waits.

And waits.

And waits.

You can probably predict the ending: Mike stops responding to Gerri’s calls, Mike’s office manager leaves, Gerri never sees a penny for her hard work, and an attorney advises her that it might be in her best interest  to cut her losses and move on. Which is what Gerri did.

We’re used to hearing stories about consumers being defrauded, but how often do we hear about businesses defrauding other businesses?

According to leading credit reporting agency Experian, business-to-business (or B2B) fraud is a multi-billion dollar per year problem for U.S. businesses. And you can bet that as more and more small businesses turn to e-commerce and virtual transactions to keep their cash flow flowing, that number will only go up.

Fortunately, the same technology that emboldens and expands B2B fraud simultaneously provides tools to avoid it. One of the most effective of these tools is tracking a business’s credit information.

While personal credit scores are protected by the FCRA, anyone can pull a business’s credit report anytime, without permission from the business. If Gerri had run a business credit check on Mike’s company, she might have saved herself a lot of stress and wasted time and money.

But even if fraud weren’t part of the equation, checking another business’s credit report is an important tool that should be used when you extend terms to another business, or make a large sale before collecting full payment up front. As a small business owner, your success depends your on customers’ ability to pay their bills on time. If your customers can’t pay their bills on time, keeping your cash flow at consistently healthy levels becomes difficult, and it can eventually force you to go under.

And, as Gerri learned the hard way, outward appearances don’t count for a lot when push come to shove in the business world. Recent financial disasters have proved that it’s sometimes the biggest and best-looking companies that end up collapsing and taking everyone down with them. No matter how good you think your relationship with a potential business partner is, you should always keep in mind that what you see on the outside is what they want you to see. Their credit history may very well reveal a different picture.

If you’re convinced that you need to perform a credit check on any company with whom you’re considering doing business, Nav’s Paid plans allow you to track detailed credit information on up to five different businesses at once. (Obtaining a single business credit report on another business would cost $40+ elsewhere.)

Growing a successful small business entails taking precautions as well as risks. (For a more complete breakdown of B2B scams and how to protect yourself, see here.) Checking the credit of the companies you do business with is one more step toward making your story a happy one.