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What Experts Think

What Is A Business Credit Check For Trade and Why Do They Matter

Wondering what a business credit check is, and why checking a potential customer’s credit rating matters? In this guide from Niche Trade Credit, we’ll discuss the basics of business credit scores and company credit checks, and help you learn why they matter when extending credit to customers.

A Business Credit Score Is Like A Personal Credit Score

If you live in Australia, you likely have a personal credit rating, which you can find using a credit check with a number of external administrations, like Equifax. Your personal credit file is likely full of credit information – like your credit card debt, credit history, outstanding loan balances, and other indicators of your financial health.

This credit history is used to determine your level of risk for lenders – they’ll make credit enquiries and use your personal information to determine if it’s safe to extend you a mortgage, car loan, personal loan, credit line, and so on. These reports include just about everything a lender would want to know about your past use of credit.

The same sort of system exists for businesses – you can use a business credit check for trade to learn more about a company’s assets, liabilities, and other important information to determine their overall creditworthiness. You can also run credit checks on individual company directors to help determine credit risk.

Business Credit Checks Help You Determine Credit Terms For Customers, Minimise Risk

Most of the time, you will obtain business credit checks from a website like Equifax, which offers business credit reports in Australia. Performing a business credit check has a number of benefits, such as:

  • Better cash flow – With a credit check, you can ensure that you are working with a reliable, credit-worthy business, and you won’t have to worry about your cash flow being negatively impacted by late payments and bad debt.
  • Peace of mind – With a business credit check, you will be able to know that you’re working with a trustworthy company, and you will be able to conduct your business with confidence.
  • Provide appropriate credit terms – For a company that has a less reliable reputation, for example, you could limit their credit terms at $20,000 and Net 30, with stiff penalties in your terms and conditions for late payment. But for a company with a better history of repayment and a better credit history, you can give more generous credit terms – like a credit line of $100,000 on Net 60 terms. This will help you develop better relationships with reputable companies.

Want more information? This guide from the Australian Securities and Investments Commission (ASIC) is useful for helping minimize risk at your company, and ensuring that your company is not negatively impacted by working with small businesses that have a high risk of default.

What About Companies That Are Not From Australia? Doing Your Due Diligence

If you regularly work with companies that are not in Australia, it’s a good idea to do due diligence and check on their corporate reputation in their home country. The process for this varies, but most countries have some type of business credit rating system.

If this is not possible, you may be able to request information about a particular company’s finances and current assets and liabilities – this should provide you with a good overall idea of their financial stability and credit history.

Additionally, you may want to protect your accounts receivable with trade credit insurance while working with non-Australian companies. Trade credit insurance provides you with compensation in the event that the company defaults, goes bankrupt or refuses to pay – allowing you to extend credit terms with lower risk.

Interested In Protecting Your Business? Niche Trade Credit Can Help

As a leading insurance broker in Australia, Niche Trade Credit can help you protect your accounts receivable with trade credit insurance and political risk insurance. We can even help you recover bad debts with business debt collection and recovery services. If you need help protecting your small business in Australia, we’re here to help. Contact us now to get started.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Experts Think

What Happens To Business Debt When A Company Is Sold

If you sell your goods and services on credit terms like Net 30 or Net 60, you may be wondering what happens to your accounts receivable and business debt when one of your customers sells their company.

Selling goods on Net 30 or Net 60 terms can be great for your cash flow, but it may pose some issues if a business is sold, and they still owe you money. A business sale can have some major ramifications when it comes to recovering debts for your small business.

In this guide from Niche Trade Credit, we’ll discuss the basics of what happens to the debt during a business sale.

Understanding The Two Most Common Types Of Business Sale & What They Mean

There are two common types of business sale in Australia, as follows:

  • Stock sale – Stock sales are usually used for larger firms in Australia, as they can be quite time-consuming and costly. In this method of sale, the purchaser will buy all of the assets and liabilities of the business. If a business sold in a stock sale owes you money, the new owner will still owe you that business debt.
  • Asset sale – An asset sale involves the transfer of specific assets and liabilities between a buyer and seller. Some assets and liabilities may be transferred, while others may not be. As you may be able to tell, this can make it very confusing when determining who owes you money.

It’s usually a good idea to try to recover outstanding liabilities and business debts before a company is sold – as it can be more complicated to try to do so after a sale.

How To Protect Your Business When A Customer Is Selling Their Company

When a customer is selling their company, you are personally liable for ensuring that you recover the debts that you’re owed. Here are a few

  • Stay aware of each customer’s status – Make sure that you know how your customers are doing, and keep an eye out for any information that may indicate they are selling their business.
  • Stop extending credit until the business is sold – If the business can afford to pay upfront, it’s best to stop extending them credit until it is sold. This will help avoid complications when trying to collect on business debts.
  • Be proactive about recovering outstanding invoices – If the customer owes you money, be proactive about communicating with the current owner and the new owner of the business.
  • Hire a debt collection service – If you don’t want to take legal action, you can hire a debt collection service to collect your debts, which makes it easier to recover what you’re owed.

Note, also, that if a company becomes insolvent and is not sold, it may also be hard to recover your debts from the business owners. Other creditors, such as lenders with personal guarantees, may have first claim to their business assets during insolvency. The Australian Tax Office may also collect unpaid payroll tax or other taxes during liquidation.

Trade credit insurance can help with insolvency, and also protect you if a company is sold and refuses to pay for past business debts. If a company in Australia or in another country goes bankrupt or becomes insolvent, your insurance policy will compensate you for a percentage of their outstanding debts.

Know How To Protect Your Company From Bad Debt When A Business Is Sold!

If a business is sold – particularly when it’s in financial trouble – it can be hard to recover the money you’re owed if you have been selling on credit. To protect yourself from this situation, you can follow the above tips.

You can also work with Niche Trade Credit to get credit insurance  services to protect your accounts receivable – or even hire us to help with debt collection and recovery. To learn more about your options and how to protect yourself, just contact Niche Trade Credit now.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.