The idea of a business credit check is a confusing topic to most people. It’s not a well-known idea in all honesty. The quick answer is “it depends”. It depends on why you’re doing due diligence. Let’s say you’re doing it in the realm of business, obviously. But it depends on what the deal is.
If you’re looking to bring on somebody to do a website for you and you’re just outsourcing the service, a business credit check is pretty insignificant in that decision-making process. You need to know if they can build the website that you need them to build. That doesn’t have anything to do with a credit check.
So here are three points to help you make a decision if you should do a business credit check:
1. Identify the situation
Let’s say you do have a situation where it is applicable, such as a merger acquisition. That is one time running a a business credit check would be applicable. The caveat though is the business has to have credit in order to do a business credit check. This isn’t like individuals where every individual can be looked up by their social security number and they have credit.
2. Know the Variables
There is a lot that goes into tracking the business. Are they a sole proprietor? Are they an LLC? Who is tracking them? How are they tracking them? You can pull reports on various means for businesses, and they’re not exhaustive. Are they a public company? Are they a private company? There are a lot of variables.
If you’re doing a merger or acquisition and you are concerned about the business’s financial history, that’s a question for somebody who does financial forensics or a CPA or a CFO who has had experience in that area. It’s applicable in mergers and acquisitions and only if the business has credit to begin with.
3. Investing in a Company
This is such a tricky situation because a lot of companies who are seeking investments or capital may not have a lot of business credit. Some of them are ideas that people are looking to get investors in.
So it’s not as simple as saying, “Well, if you don’t have any business credit, then that’s bad.” Business credit serves a very specific purpose, and not all businesses need business credit. Keep in mind that business credit is not the same as the business’s financials. Small businesses may not operate off of credit, so you’re not going to find any information on that company through a business credit check.
We always deconstruct the situation first when someone comes to us and ask this question. What is it that they are doing due diligence for? A lot of times what happens is the person thinks they need to do a business credit check, but that will not result in them getting the information that they need. Really what they are looking for is aptitude or the business’s financials, a P&L statement or something like that. That’s a whole different ball game than a business credit check.
It gets even more difficult to figure out when you throw companies into the mix who claim they offer business credit checks. A lot of them will claim they are able to run those searches, but the databases that compile business credit information are so small in numbers. Then you have to throw on top of that if they’re accurate and/or up to date or not. So they may claim to run those, but then if you look at the fine print, they may have a singular database or are just scouring the net.