Credit Information on Businesses

Credit information is generally easier to obtain for businesses than for individuals because businesses often have more publicly available information than do individuals.

The amount of information you collect should be in proportion to the amount of credit you intend to extend. If the credit limit you're offering is relatively low (say, $500), and the company has a good credit reputation as far as you know, you may not want to spend your time gathering more credit information. If, on the other hand, you intend to offer a high credit limit to a company that you don't know well, you may want to collect as much information as possible.

Financial statements. Financial statements are a valuable source of information. They'll tell you about the company's cash flow and about the income it's generating. You should ask for the current balance sheet, the current income statement, and previous years' financial statements. You don't have to be an experienced accountant to get useful information out of them. Here are some tips for using these documents:

The balance sheet is probably the most useful of the documents. It will show you both the cash the company has on hand and the amount of money it owes to other businesses. That will give you a general idea of its present ability to pay its debts.

Another way to gauge a business's creditworthiness is to compare two sets of numbers.

The first set of numbers to compare is the ratio of the company's current assets to its current liabilities. This is called the current ratio. If the current liabilities are greater than the current assets (in other words, the ratio is less than 1:1), the company is probably not a good credit risk. Anything over 2:1 (in other words, the current assets are at least twice as much as the current liabilities) is a sign that the company is probably a good risk. Anything between 2:1 and 1:1 is an iffier proposition, and you should probably seek more information.

The second set of numbers to compare is the company's total equity to its total debt. This is the debt-to-equity ratio. If the total debt is more than the total equity (in other words, the ratio is less than 1:1), you should be careful. This is especially true for smaller companies. It is not uncommon, however, for larger companies to carry more debt than they have equity.

Income statements and the previous years' financial statements are generally not as helpful as balance sheets. But if you can get your hands on statements for the past three or four years, you should be able to get some feel for how the company has been doing by comparing the numbers. If income is on the rise during those years, the company is growing and it may be a good credit risk. If not, perhaps you should be hesitant to extend it credit.

Credit references. Businesses can also give you credit references. But let's realize up front that credit references are, for the most part, worthless. If you ask for a reference, which names and numbers will a potential creditor give you? It'll give you only those references who will say good things. The only value to these references, then, is if you call a credit reference and they give you negative information about the business (or say they never heard of it). In that case, you know that the company's credit isn't any good, if their best references have bad things to say about them.

A possible alternative is to find out on your own who else they do business with, and ask those companies about them. If you have salespeople, they are often a good source of information about who else the company does business with.


If you get a call for a credit reference on someone else, be careful what you say. Don't give any opinions. Tell them only the amount the customer owes you, the current amount due, and the amount that is 30 days, 60 days, or 90 days past due. In short, give them only what they could get if they saw a statement you sent to the customer.