Where Credit's Due - Company Business and Marketing - Industry Trend or Event

Home Office Computing, July, 2000 by David A. Harvey

Is that customer worth the risk?

FOR MOST HOME BUSINESSES, CUSTOMERS comprise a mix of individuals and other small businesses. Talk to financial experts, and they'll tell you that offering customers a line of credit is one of the best ways to increase revenue. And it makes sense. You'll be able to move inventory faster and broaden your customer base by working with individuals who have good credit. Offering credit also establishes your business's legitimacy.

But before you extend credit, provide payment plans, or set up consignment deals, you'll have to verify a customer's creditworthiness. This means researching a customer's payment and credit history, and predicting the chances of that person's reneging on a debt. However, you don't have to spend business hours pulling reports from multiple agencies or sifting through records; we'll help you get the information you need quickly and easily.

First Stop ... To get started, visit Creditworthy Co. (www.creditworthy.com), where you'll find links to credit providers, tutorials on credit, and detailed information on analyzing financial statements. Another useful resource is the National Association of Credit Management (www. nacm.org); the site features much of the same data, as well as a library of basic credit forms and links to training events and NACM member companies.

When it comes to credit reporting, a handful of big players have virtually sewn up the market. The top firms include Equifax (www.equifax.com), Experian (www.experian.com), Chex Systems (www.chexhelp.com), Trans Union (www.transunion.com), and DowJones.com (www.dowjones.com).

In addition, several credit-reporting agencies handle specific industries, such as the Lumbermen's Credit Association Inc. (www.lumbermenscredit.com) and GoFish.com (www.gofish.com) for the seafood industry. Most businesses, however, tend to stick with general sources.

Information, Please Once you've settled on a particular provider, the next step is getting the report. Securing business data is a snap; most agencies will provide credit reports on a business of any size online for about $15. You can also order basic risk analyses for about $100 each.

Checking an individual's creditworthiness is a bit trickier. Because privacy laws protect consumers from intrusions into their financial data, you can't simply surf to a Web site and pull down that information. When you select a credit bureau, the company carefully screens your application before approving it. Once approved, however, you'll have access to a surprising amount of information, such as employment and education history, as well as previous addresses.

You can get credit reports online or via phone, fax, and postal mail. Some services even have dedicated software that pulls records and uses complex algorithms to assess risk. A reasonably detailed individual report will cost between $20 and $50.

Creditor Beware Credit reports are complicated, and no two agencies report the same items the same way. Consequently, you must carefully read the sample reports each agency provides. The companies also offer guidelines that help you figure out when to extend credit.

Experian, Trans Union, and Equifax provide detailed information at their respective sites. And although these companies certainly play to big businesses, each offers excellent support for small and home-based businesses as well.

The Bottom Line Focus on what you need, and be conservative. Small and home-based businesses in particular are sensitive to uncollected debt. This means you should deal only with businesses and individuals that have sterling credit reputations. If you don't plan on extending credit often, your best bet is one of the major agencies.

Analyze This

Once you've obtained a credit history, the real work of credit risk assessment begins. A full-fledged risk analysis uses sophisticated models to predict the chances that a customer will meet financial obligations--analyzing data such as missed and late payments.

On Your Own If you want to perform an analysis yourself, you'll need to come up with some basic rules about to whom and under what circumstances you will extend credit. To help, credit-reporting agencies include a basic "credit health" designation on each report. But if you're dealing with large amounts of money, buying a basic risk assessment is worth the investment.

Send It Out Some agencies let you outsource almost all your credit risk management, and in some cases, payment chores, for a monthly or percentage-based fee. Companies' offerings range from the simple (you provide the information, and they provide the assessment) to the sophisticated (near real-time online analysis).

For an extended list of financial firms that provide in-depth risk analysis, head to Yahoo's Credit Risk Management section (dir. yahoo, com/Business_and_Economy).