Trade credit reporting provides information on a company’s credit and invoice payment history to prospective creditors. The Big Three CRAs maintain data on hundreds of millions of companies worldwide, while startups struggle to break into the industry. Trade credit reports help companies determine credit terms and lenders/investors assess risk. However, the reliability of CRAs has been questioned due to their failure to alert the investment community to questionable financial conditions of companies that ultimately failed.
Trade credit reporting is the release of information about a company’s credit and invoice payment history, drawn from databases maintained on all companies and provided to prospective creditors. Some of the same companies that provide consumer credit reports also provide trade credit reports, but there are other companies around the world dedicated to trade credit reporting that are not involved in consumer credit reporting. Reliable trade credit reporting is absolutely critical to commerce around the world.
Nine major credit rating agencies (CRAs) operate worldwide; three of them, called the Big Three, are based in the United States. As is the case with most industries, there are startups trying to establish themselves, sometimes offering different approaches to trade credit reporting, but it’s a very difficult industry to break into. Members of the Big Three each maintain data on hundreds of millions of companies around the world, numbers that far exceed the capabilities of startups.
Trade credit reporting is used by companies that are considering doing business with other companies. It can help them determine, for example, how reliably a business pays its bills and what credit terms to offer. CRAs collect data from a number of different sources, often relying on self-reported data from companies in the database. The data is validated by periodic random surveys.
Lenders and investors also rely on trade credit reporting 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 lenders require when individuals apply for credit, such as home loans or auto 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 dispute over the value of CRAs. Their reliability in issuing standard credit reports for the purpose of doing business, such as buying and selling supplies and equipment, has not been severely tested, but their failure to alert the investment community to questionable The financial condition of many companies that ultimately failed has shaken the community’s faith in their worth. Enron, the energy giant that collapsed in late 2001, was rated as an excellent investment and credit risk until less than a week before filing for bankruptcy. AIG, the world’s largest insurer, also had a very good credit rating until the day before its precarious finances forced it to accept a huge bailout from the Federal Reserve Bank. Other troubling stories abound, such as the ratings downgrades of companies that refused to pay them for more favorable ratings. One consequence of the 2008-2009 recession was a congressional-ordered investigation into the role of CRAs in the crisis.
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