Finding the credit rating of a small business who has asked your business for credit isn’t easy.

Privacy laws prevent a person or non-institutional business from seeking the credit rating of another person or their business. However, there is a way around this.

If someone or another business wants your business to extend credit to them, I would suggest that you give this some considerable thought. The reasons being that you are not a bank or a financial institution so are you really in the business of lending money?  Every time you extend credit to another business you are in effect funding their business. You are allowing their cash flow to be used to extend their business at the expense of yours.

If you do decide that their business is important to you and they are a good credit risk, you are making a conscious decision that you anticipate making more money by allowing them to use your money. In effect, by extending them your credit facilities, you need to expect them to spend more with your business than what you are probably going to have to pay for on your own debts. This is a business decision and one that many small business owners don’t seem to take into account.

Before you agree to extend them the use of your credit facilities, you need to check their credit rating of past performances with other business. To do this, you will need to have a credit application form drawn up by your lawyer so there can be no mistakes. The two important points on this form will need to be:

1. They are authorizing and agreeing to you checking their credit rating of financial responsibility
2. They are furnishing you with the names of current credit providers and authorizing you to check their references.

These credit application forms need to be legally constructed because if the relationship fails they may need to be exhibited in court as evidence.  Also ensure that it is an authorised person (ie: the business owner or financial officer responsible for the businesses financial affairs) who is legally able to sign contracts on behalf of the business.

Checking the credit rating of a small business through a credit reporting agency can be time consuming so be sure to allow plenty of time for a report to be made before extending them any credit. While this is happening, also make sure that you check out their credit references they have supplied you with by speaking to the person in charge. They are unlikely (or shouldn’t) give you more information than the fact that the business pays their bills on time or not.

If the business requesting credit from your business is a slow payer and doesn’t pay inside of 90 days, can your business continue to support their cash flow?  If not, then make sure that the credit advice/notification that you send back to the business clearly states the terms and conditions of the credit facility.

It is important that you check out a small businesses credit references closely and that you get a credit rating of a business before extending them credit.