A credit report contains multiple scores that show the (financial) reliability of an organization. But a credit report alone does not say much about the financial health of a company. It is the interpretation and risk appetite of the supplier that gives meaning to the information from the report and the final assessment of a customer or prospect. The scores and other financial analyzes are an indispensable tool for determining your policy. What are the most important scores on a credit report? And how do you interpret these scores?
A credit report contains various indicators that show the strength or weakness of a company. This is clearly and precisely presented - in this way all data is also understandable for less financially competent employees.
Some focus on just one score from the credit report. But: a single score never stands alone. It must be placed in a broader perspective. You, therefore, do well to ensure that the major credit information agencies provide you with good scores. This makes it likely that your business relationship will judge you positively.
Below you will find out more about which scores should not be missing on a credit report?
1. The credit advice
The credit advice indicates the amount of which it is responsible for doing business with a company. The amount of this amount is calculated by parameters in the annual accounts. A basic credit limit is set based on equity capital and working capital.
Are no annual accounts available and is there no parent company with annual accounts? Then equity and working capital are estimated by comparable companies (by size). The basic credit limit is adjusted to the final credit advice using the established PD rating (probability of default).
The credit advice constitutes a value judgment in the short term. Because if you have an insight that an organization can pay its invoices, this does not say anything about the correctness of its payments. This information is included in the payment score.
2. The payment score
The payment score indicates to what extent an organization pays its invoices on time. This score can be calculated on the basis of experiences from different suppliers. All payment experiences of the past 12 months are reduced to an average score of 1-9.9. The payments with higher amounts weigh heavier on this. There is: the higher the score, the better. It means that an organization pays its invoices according to the agreements.
3. The Credit flag
The Credit flag is the most obvious outcome of the scoring model and works like a traffic light. In short, it is a simple translation of the credit advice. What does the 'traffic light' of the Credit flag look like?
Green = lending to the advised credit advice yields few problems according to the data.
Orange = granting credit is accompanied by an increased risk (so here too it is wise to make specific agreements, such as partial deliveries).
Red = An option may be to go into the sea only if the customer pays in advance. It is, consequently, essential to look carefully at suitable delivery conditions.
Combining these scores can create an ideal situation to introduce an unambiguous decision process in your company. The scores form the basis for modern decision models. A decision model offers an output that follows from a specific question from the decision-maker. In the formulation of that output, the model observes particular parameters (the threshold values of the most critical scores), which are predefined. It means that a decision maker does not have to make a credit assessment himself, but that this is now the decision model. Especially in the B2B, a decision model can be of great value to shape the customer acceptance policy.
Published by Mudassar Ali