Competing companies in the distribution industry create credit circles to share information about a customer’s payment practices, allowing them to assess and limit their own risk. Credit circles meet frequently and must avoid unethical or illegal behavior, as established by various statutes. They cannot offer opinions on whether a debtor should receive credit, dispute credit limits or terms, or establish a full dealer-wide line of credit. They are also prohibited from forming agreements that provide an unfair business advantage or discourage competition.
Large industries, particularly those involved in the distribution of goods, regularly extend credit agreements to their customers. These agreements are often between the dealer and other companies and can involve large sums of money. Since several competing companies within an industry may deal with the same customer, it is beneficial for all those companies to know that customer’s payment practices. Often these companies will create a credit ring as a means of sharing that information.
A credit circle offers additional benefits to a traditional credit check. Most importantly, the circle can have access to information about a customer’s late payments without the 30-90 day delay that is common with credit reporting agencies. Also, credit managers often notice quibbles that would not be reported to the credit bureaus. For example, if a company historically paid its debts in full each month, but has only begun to pay a percentage, that would be an indicator of financial stress that might otherwise be overlooked.
It is common for a credit circle to meet frequently, sometimes six to 12 times a year. Additionally, group members have a responsibility to alert others if the typical payment pattern of an ordinary customer suddenly changes. The other members of the circle are then in a position to assess and limit their own risk.
Since a credit ring is made up of several competing businesses, the group must be very careful to avoid unethical or even illegal behavior. Various statutes, including the UK Competition Act 1998, have been enacted to prevent unfair and financially damaging business practices. These laws have established what can and cannot be discussed or agreed to by members of credit circles.
Members of credit circles can offer information about the details of a debtor’s payments; however, they cannot offer opinions on whether or not that debtor should receive credit from other companies. Similarly, customer credit limits and the terms of credit agreements cannot be disputed. In essence, credit circles cannot establish a full dealer-wide line of credit for any particular customer.
Additionally, members of a credit ring are prohibited from forming an agreement among members that provides an unfair business advantage or discourages competition. Agreements to standardize industry prices or employee wages are expressly prohibited. Furthermore, the credit circle as a whole cannot make a joint decision to deny business to any group or individual.
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