10 red flags to watch out for when assessing a company credit report

As a business owner or financial decision-maker, keeping a keen eye on the credit reports of?your customers and suppliers can provide valuable insights into their financial health.?

Identifying potential risks early on can save you from potential losses and strained relationships. In this blog post, we'll outline ten red flags to stay alert for on company credit reports that can act as an early warning for your business dealings.

County Court Judgments (CCJs)

A County Court Judgment is a court order issued against a company that has failed to repay a debt. The presence of CCJs on a company credit report is a significant red flag, indicating that the company has struggled to meet its financial obligations in the past. Multiple CCJs or a high value of outstanding debts can signal a higher risk of non-payment or late payment from the customer or supplier.?

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Poor Financial Performance

Another red flag alert is poor financial performance, which can be reflected in negative profit, declining revenue, or mounting liabilities. These indicators suggest that a company may be struggling financially and could face difficulties in fulfilling its commitments. Carefully examine their balance sheets, income statements, and cash flow statements to assess their financial health and the likelihood of them meeting their obligations to your business.

Frequent Changes in Directors

A pattern of frequent changes in a company's directors can be a red flag for instability. This may signal internal strife, management issues, or a lack of strategic direction, which could impact the company's performance and reliability as a customer or supplier. While changes in directors can be a normal part of business growth, a high turnover rate warrants further investigation.

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Complicated Group Structures

A complex or convoluted group structure can often be another red flag. When a company has numerous subsidiaries, parent companies, or affiliated entities, it can become challenging to trace ownership and financial responsibility. This complexity may also make it easier for a company to hide financial problems, as liabilities and assets can be distributed across various entities. Be cautious when dealing with businesses that have intricate group structures, as the potential risk of non-payment or supply chain disruption could be higher.

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Change of Ownership

A recent change in a company's ownership can be a red flag, signaling possible instability or changes in the company's direction. New owners might have different priorities, management styles, or financial resources, which can impact the company's performance and its ability to meet its obligations to your business. Keep a close eye on companies that have recently undergone an ownership change to ensure they continue to be reliable partners.

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High Credit Utilisation

If a high proportion of a company's available credit is already used, it? can be a red flag that a business is overly reliant on debt to finance its operations. A high credit utilisation ratio may indicate cash flow issues, which can make a company less likely to pay its bills on time or fulfill orders. Monitoring the credit utilisation of your customers and suppliers can help you flag potential risks before they become problematic.

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Negative Public Perception or Media Coverage

While not directly tied to a company's credit report, negative public perception or media coverage can be a red flag that impacts a company's financial stability. Bad publicity can lead to lost customers, reduced sales, and ultimately, financial difficulties. Be proactive in monitoring news about your customers and suppliers to identify potential risks and take necessary precautions to safeguard your business.

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Sanctioned Companies or Individuals

Companies or individuals on sanction lists can pose a significant compliance risk for your business. Sanctions are restrictive measures governments or international organisations impose to achieve specific foreign policy and national security objectives. Engaging with sanctioned entities can lead to severe consequences, including financial penalties, reputational damage, and legal ramifications. Be vigilant in checking the company credit report and conducting due diligence to ensure that neither the company nor any of its key personnel are subject to sanctions.

Politically Exposed Persons (PEPs)

Politically Exposed Persons are individuals who hold or have held a prominent public position or have close ties to someone who does. PEPs may pose a higher risk of bribery, corruption, or money laundering due to their political connections and access to public funds. Conducting thorough background checks on the company's directors and key personnel can help you identify PEPs and assess any potential compliance risks they may present.

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Frequent Credit Report Views

A high number of views on a company's credit report can be a red flag that signals potential issues. This could indicate that the company is attempting to obtain more credit, suggesting cash flow problems or financial instability. Additionally, a sudden increase in the number of credit report views might mean that other businesses are reviewing their report for negative reasons, such as concerns about late payments or defaults. Monitoring the frequency of credit report views can help you stay aware of any potential risks that may impact your business relationship with a customer or supplier.

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By keeping an eye out for these ten red flags on company credit reports and conducting thorough due diligence, you can effectively assess the financial health and stability of your customers and suppliers. Identifying potential flags early on can save your business from potential losses and strained relationships, helping you make well-informed decisions and maintain strong partnerships in the long run.

Hope you have found this insightful.