Business credit reports provide information on a company’s credit and bill payment history, used by potential creditors and investors. The industry is dominated by nine major credit rating agencies, with three based in the US. However, there is controversy over their reliability, as they failed to alert investors to the financial problems of companies such as Enron and AIG.
The commercial credit report is the issuance of information about a company’s credit and bill payment history, extracted from databases maintained in all companies and delivered to potential creditors. Some of the same companies that provide consumer credit reporting also provide business credit reporting, but there are other companies around the world that do business credit reporting that do not engage in consumer credit reporting. Reliable business credit information is absolutely critical to world commerce.
Nine major credit rating agencies (CRAs) operate around the world; three of them, called the Big Three, are based in the United States. As is the case with most industries, there are new companies trying to get established, sometimes offering different approaches to business credit reporting, but it’s a very difficult industry to break into. Members of the Big Three maintain data on hundreds of millions of companies around the world, figures that far exceed the capabilities of start-ups.
The business credit report is used by companies that are considering doing business with other companies. It can help them determine, for example, how reliably a company pays its bills and what credit terms to offer. Credit rating agencies collect the data from several different sources, often relying on self-reported data from the companies in the database. The data is validated through periodic random surveys.
Lenders and investors also rely on business credit information to determine the risk associated with investing in a particular company. For some smaller companies, these reports are very similar to the consumer credit reports requested by lenders when people apply for credit, such as home loans or car loans. However, credit reports issued on larger companies can be quite lengthy and complex, as they can be used to help investors decide whether to buy debt such as corporate bonds.
There is an ongoing controversy about the value of CRAs. Its reliance on issuing standard credit reports for the purpose of doing business, such as buying and selling supplies and equipment, has not been strongly questioned, but its failure to alert the investment community to the questionable financial condition of many companies that ultimately failed has rocked the community. faith in its worth. Enron, the energy giant that collapsed in late 2001, received excellent investment and credit risk until less than a week before filing for bankruptcy. AIG, the world’s largest insurer, also had an excellent rating until the day before its precarious finances forced it to accept a large bailout from the Federal Reserve Bank. Other troubling stories abound, such as the downgrading of companies that refused to pay them for more favorable ratings. One of the consequences of the 2008-2009 recession was a congressionally mandated investigation into the role of CRAs in the crisis.
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