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Benefits of monitoring your suppliers credit rating

Understanding your business better makes sense

· Business

Benefits of monitoring your supplier’s credit rating

Although often overlooked, the business-supplier relationship is a crucial part of achieving both immediate and long term success. To do well most companies, whether they are in the product or service industry, are dependent on suppliers, yet many undervalue the relationship, and even abuse it by settling invoices late or demanding unreasonable discounts.

On the other hand, companies with cordial supplier relationships have many positive effects, including faster order turnaround, top quality workmanship or materials, insider tips on what industry competitors are up to, or insights into new technologies, products approaches, and finally perhaps even more flexible credit terms if they are ever needed.

So, the benefits of establishing and maintaining a positive connection with suppliers are quite clear, as the ultimate aim is to acquire the best possible product or service, for the best possible price. Having said that, above and beyond the way a business and supplier interact is the need for the one thing a company needs to thrive or even survive – reliability.

Why monitoring a supplier’s credit rating is vital

Issues raised by obviously unreliable traits are the easiest to deal with largely because the problem is so visible, so a supplier who consistently deliver late or lets you down can be reprimanded or replaced. Why can be trickier are those things which are hidden from everyday viewing, such as credit ratings. In order to stay several steps ahead of major problems it is wise to make monitoring your supplier’s credit rating a priority, as this could well help you identify any issues with reliable production goals or delivery dates before they have a serious and negative impact on your business.

Another major motivation for a larger company to monitor their supplier’s credit scores is the very realistic concern that so many smaller businesses are being financially squeezed due to invoices being paid later, sometimes way later, than their due date.

How things work

The word of business tends to operate in a chain. Here’s a basic example:

Farmer B tends grows, and picks apples which he sells/supplies to Company A.


Company A wash and sort the apples before selling/supplying them to Company B.


Company B use the apples to make cider, before selling/supplying their drinks to Company C, a major supermarket.

If the farmer’s crop fails Company A are let down by their supplier, and consequently are unable to fulfil orders from Company B, who are depending on those apples to make cider. In turn they under deliver to the supermarket, and risk losing their standing with the retailer, in addition to the already lost revenue.

With luck this episode will be a one-off, and any debts incurred by anyone in the chain could show on a credit rating report as a blip, cancelled out for the most part by a history of good financial management. So if the companies involved are financially buoyant then the loss could well be absorbed, but what if they are not? Or if one link in the chain is consistently letting down the other links?

The sensible solution is to monitor a supplier’s credit rating over a long enough period of time to identify worrying patterns, or any potential issues which could negatively impact on your own business. This also allows you to make contingency plans, such as sourcing alternative suppliers, or paying invoices faster to a struggling current supplier, in plenty of time.

What to look for in a credit rating report

Should you choose to sign up for a scheme where for a fee a current credit rating report on one or more of your suppliers, along with automatic updates are provided for you, the information covered is likely to:

  • Include data on any past court judgements, legal action, or bankruptcies the company has had.
  • Alert you to any new legal issues which could affect your relationship – a good way to avoid unreliable or possible delinquent debtors.
  • Provide timely updates on all changes to the current credit score.
  • Give a general impression of how the company finances are managed.
  • Supply a clear as possible idea of whether financial down periods are a one-off or indications of a dangerous pattern.
  • Monitor the company’s net worth, noting any changes, whether positive or negative.
  • Help you decide whether it’s time to cut the cords with a particular supplier.

Running regular credit rating checks on your suppliers is one of the key ways you can best protect your own business, and rather than being an option it is in fact an essential, responsible and very important thing to do. Over and above whispers, rumours and assumptions, a credit rating report is the reliable way to get accurate information on how well (or not) your suppliers are holding up financially. In turn this reduces your company’s risk factor, and could well also avoid damage to your company’s credit rating should you get caught up in a serious supply chain failure.

A sensible business owner will always seek to act fast if any of their supplier’s credit rating changes in such a way to threaten their own ability to function properly. In some lines of business supplier’s are plentiful, so say finding a decent replacement wouldn’t be such an onerous chore, although of course checking out a new supplier’s credit rating and product quality means that sudden switches are not necessarily possible. However, in some cases suppliers are harder to source, which heightens the need for constant monitoring of their long term viability.

A sensible business approach is to always set up a thorough credit rating check on a supplier before ever conducting any business with them, as this could well raise red flags which can be acted upon before any financial damage is done to your company or your company’s future credit rating.

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