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Easy Ways to Screen International Companies for Credit Risks
Using the latest technologies to run your business has its benefits and shortcomings. Thanks to the many techniques that are available today, a company can set up shop in any part of the world and use tools that facilitate communication and ease of doing business, such as efficient supply chains and virtual data rooms, to deliver products and services to customers all over the world. The possibility of doing business remotely with the two parties involved in the transaction not necessarily meeting physically has its downsides too. For instance, it enables fraudsters and delinquent companies to put on a front that makes them look legitimate.
Dealing with companies that do not have an honest profile can be difficult, especially when a company offers goods on credit. Therefore, it is imperative for companies to do an extensive background check of the organization they are getting into business with to ensure that the loan they extend to it will be paid in time.
In today’s business environment, you can do a background check on any company easily because most services are streamlined. Most countries set the registration of a company as a prerequisite for doing business within their borders. In the United States, for instance, the Securities and Exchange Commission has an extensive database popularly known as the EDGAR system. This is where all publicly traded companies and corporations are required to file quarterly and annual corporate reports and financial records. The requirement is not limited to companies based in the US but also applies to any foreign company that does its business on a global scale and is listed in the US stock exchange.
For smaller businesses that might not be listed on the stock market, some companies avail online credit reports to registered firms. The credit reference bureau also avails credit reports for both individuals and organizations upon request. With this information, a firm can avoid making bad credit decisions because it will be able to assess the risks of extending credit to a particular company.
With the online space being highly competitive, legitimate businesses manage to stay ahead of their competition by commanding a robust online presence. This can be used as another way to filter out legitimate businesses from deceitful ones. For instance, companies that have up to date profiles online and whose social media pages are updated frequently are likely to be in good books and can sustain any credit they take. Many organizations take credit and rely on sales to manage their payable accounts, something that results from extended credit. When a firm has frequently updated websites and social media pages, it could mean that it has a regular flow of business. As such, the firm will most likely be able to meet its credit obligations within the required time.
Companies should treat neglected websites and social media pages as a red flag when it comes to extending credit. Without concrete proof of sale volumes, firms that do not update their online profiles regularly might be a credit risk.
The period that a business has been in operation should also be considered when assessing the online presence of a business. Businesses with websites that have been created recently and only have content spanning a few months might be experiencing teething problems that are common to most newly established businesses. Extending credit to such a company exposes one to high risks. According to Investopedia, 20% of newly established businesses fail within their first year, 45% fail within the first five years, and only about 25% of new companies make it past 15 years in operation.
Contacting the business using their provided contact information is another easy way that a firm could use to assess the credibility of a company. The response time interval between when the phone starts ringing to when it is answered reveals a lot about the customer relationship of the business. According to a survey conducted by Ring Central, phone calls are the preferred method of communication followed by email for people over 40 years of age.
Modern technology offers even better ways of communicating and proving the legitimacy of a business. For instance, you could use teleconferencing and live video communication channels such as Skype, Zoom or Microsoft Teams. A company that has credibility should allow customers to call in using video calls where both parties can see each other. This not only proves that real people are running the business but also goes further to show that they have a physical location from where they conduct their business affairs.
Getting into bad debts is a position that every business wants to avoid because it is inconvenient for both the creditor and the debtor. For the company that has extended credit, bad debts cause a stall in business and lead to extra expenditure due to the additional costs of collecting debts. For the company that is unable to honor its loan repayment obligations, it risks getting harmful listings and a bad reputation that could see it miss opportunities in the future.
Collecting bad debts and enforcing payments on overdue accounts can be hectic and costly for a business. Many companies opt to outsource the collection of delinquent accounts to debt collection agencies and pay them commissions depending on the amount collected. This is convenient for the creditor since the extra costs involved when enforcing payment are pushed to the debtor or the debt collection agency while at the same time avoiding disruption of business.