Credit Risks for Businesses

Unlike consumer credit reports, business credit reports are gauged by a depressed set of parameters, producing what the industry refers to as a tri-partite score. Perhaps easier to understand is the relationship between a company's credit risk and the type of industry it is in. The more credit-worthy and stable a company is, the easier it is to get credit lines, and the higher the financing potential. That is why companies are more attracted to growing companies that are stable. It’s one reason that the largest businesses in the world often take on dependable clients, and other more techie companies can be less affected. However, a different type of company with different industry and financial nuances can produce totally different results. Even the most credit-worthy companies can have credit risk that's much higher than most others. If most firms in the market are stable, credit risks within those companies are stable too. That makes getting credit lines with many companies in the same industry somewhat difficult. On the other hand, borrowers with the right type of credit risk can receive credit lines and other types of financing that they’re never had before. That, when using a entrepreneur credit risk, is a new transaction on an otherwise established industry.

One of the primary contributors to a company’s credit risk is the competition the firm may face from other firms from outside of the equity holder community. Over the long term, credit risk depends on the stability and projected growth of a company rather than the strength of it’s core competitors. Many investors insist that maintaining strong competitors helps to protect the market, and so keeping challenging new products or the entire company in the market is a good idea. As an example, if bulk buyers, subcontractors like wrongful death repairs, and contractors like concrete and landscaping companies stay in business and compete fairly, credit risk should be lower because even if all of these firms were to fail, their competitors would not likely go bankrupt. On the other hand, if the core of the company goes down, without the new buys coming in to replace these services, the remaining companies might not even be able to pay their bills. In other words, despite all of these risks, if a company had a new product that was a well-established product like fax machine design, it might even be able to rely on advertising and new product introductions to gain new revenues. These new revenue trends can offset the downs in the core of the company. So a more stable company with a more diversified core of services can be safer, because profits can still come in even for the less stable companies.

With credit risk as important as it is, there are several steps that businesses can take to mitigate the risk. Most important is credit evaluation, which solicit your business credit report to determine what your business credit rating is. That report provides the numbers for your risks. But what are your credit risks?