Understanding international company credit checks

Fortunately, we live in a world where doing business internationally is easier than ever. Markets can now expand across the globe, providing endless opportunities for businesses. With this interconnectivity, however, comes the need to perform international company credit checks. Companies need to take the time to understand who they are conducting business with, especially internationally, as this will help safeguard them against huge financial risks.

Here, we’ll discuss what international company credit checks are, why they’re important, and how they can be conducted efficiently to get the most out of them. We’ll also look into the key factors that influence a company’s creditworthiness, the risks of not performing an international company credit check and best practices when it comes to assessing global international business partners.

What are international company credit checks?

Essentially, an international company credit check is there to ensure that any company you are about to conduct business with is financially sound. You’ll want to ensure that they are reliable when it comes to payment and whether or not they are a profitable company.

Domestic company credit checks rely on one centralised system within a country, but when it comes to international checks, the navigation of diverse legal frameworks, financial reporting standards and the availability of data is involved, as each country will have its own set of regulations.

So, various pieces of information will be compiled and analysed in order to provide a more holistic view of the company’s financial health. Typically, an international company credit check will include:

Company information: Information like the legal name of the company, registration details, the operational status and the company structure will be included.
Financial statements: Balance sheets, income statements, and cash flow statements will be looked at and are often adapted to local accounting principles.
Payment history: There will be records of how the company pays suppliers and creditors included in the check (especially if there are any late payments)
Credit ratings and scores: Any local credit checks that have been conducted in the business’s country will also be included and will act as a measure of risk.
Public records: Information on any judgments or bankruptcies will be included in the international company credit check, including any legal or adverse events.
Director and shareholder information: Details around the company’s shareholders and directors will offer insights into how stable and legitimate the company is.
Industry and country-specific information: Information about the market the company operates in will also be included in the credit check, as well as any economic trends and the political stability of the country.

Why are international company credit checks important?

There is enough risk in conducting business with any company, let alone an international one. This brings a lot of risk, which is why thorough checks need to be conducted. Here’s why international company credit checks are important:

1. Minimising financial risk

The most obvious reason to conduct international company credit checks is that you’ll be able to prevent bad debts and non-payment. This will allow you to protect your cash flow as much as possible and to be able to identify any fraudulent companies before they impact your business negatively.

2. Protecting your reputation

Unfortunately, conducting business with companies that are disreputable or that are in financial turmoil will negatively impact your company’s reputation. This can harm your brand’s image and can decrease trust amongst your customers and investors.

3. Informed decision-making

International company credit checks will provide you with the information needed to set the correct credit limits, negotiate the best payment terms, and allow you to make the right decision on which international company to conduct business with. So, now you can make the best strategic decisions for your business, empowering you to tailor your approach to each business relationship accordingly.

4. Compliance and due diligence

It is always going to be in your best interest as a company to implement due diligence when it comes to conducting business with other companies. This is crucial in an era with increased regulatory expectations and scrutiny (this is especially true around anti-money laundering and anti-bribery laws).

5. Gaining a competitive edge

Your company will automatically be able to secure better deals and be more proactive when it comes to business opportunities. This way, your company will gain a competitive advantage over companies that don’t conduct international company credit checks.

Key factors influencing a company's international creditworthiness

So, what exactly influences a company’s international creditworthiness? There will be many factors to take into account when deciding whether or not to go into business with an international company.

Let’s look at this in more detail:

Financial health: First off, you want to ensure that the company is generating enough cash to function successfully. So, look into the company’s revenue trends, debt-to-equity ratios, profitability, and cash flow.
Payment history: Next, you’ll need to look at how promptly the company pays its bills and if it has a history of late payments or defaults.
Credit utilisation: This may not be as transparent for private international companies, but it is always a good idea to look into how much credit they are currently using, as this can indicate financial strain.
Length and diversity of credit history: A company that has a more consistent history when it comes to positive credit behaviour will indicate that it is more reliable and stable.
Public records: if there are any issues regarding bankruptcy, liquidations, lawsuits or legal judgments, it could impact the reliability of the company.
Company information: Certain information, such as the company’s legal structure, the number of years it's been in business, the type of industry it is in or if there has been any change in management or ownership, will provide you the context you need to make an informed decision.
Country-specific risk: One of the most important factors to take into account will be the economic stability of the specific country you’re looking to do business in. Pay attention to the political environment, currency fluctuations or any potential for trade sanctions or civil unrest, as these may affect the business’s ability to pay.
Industry-specific risk: Look out for any significant changes or pressures that may be impacting the sector the business operates.

The risks of not performing international company credit checks

The risks of not conducting international company credit checks is too big to ignore, and doing so will lead to significant repercussions, such as:

Increased likelihood of bad debts

The most important thing to prevent from happening to your business is bad debts, as your business will directly suffer financial losses because of this.

Cash flow issues

Another detrimental consequence of not conducting international company credit checks is that you may encounter cash flow issues.

When there are large payments that don’t arrive from international partners, it can disrupt your company’s cash flow, which will impact your ability to pay suppliers, employees, or to be able to invest in growth.

Damage to business relationships

If you happen to have a negative experience with one international company, you will naturally be wary of any future global ventures. This may also damage your company’s reputation in specific international markets, too.

Exposure to fraud

Conducting business internationally can increase the likelihood of your company being subject to fraud. If your company doesn’t undergo proper vetting, it will become an easy target for this.

Also, in certain countries, failing to conduct reasonable due diligence will expose your company to legal penalties, especially concerning anti-money laundering (AML) or counter-terrorist financing (CTF) regulations.

Suboptimal deal terms

If you don’t have the right amount of insight into a potential business partner’s financial health, you won’t be able to negotiate effectively.

This means that you may find your company extending overly generous credit terms to a company that is high-risk. Equally, your company may miss out on opportunities to demand better terms from one that is creditworthy.

Conducting international company credit checks effectively

There are a few steps you can take to support your company’s efforts in being safeguarded against risk in international trade.

1. Utilise reputable international credit reporting agencies

Make sure that you always use reputable credit reporting agencies that are trusted, as these companies have established networks and can access bigger and more reputable data sources.

At Creditserve, we have the resources to be able to give you a detailed report on your partner's or customer’s creditworthiness.

2. Gather comprehensive information

Ensure that you gain enough information on your potential business partner or customer that enables you to analyse their financial statements, payment histories or if there are any adverse public records.

Also, make sure that you understand the contents of the international company credit check, looking at how they’re structured and the different data points included.

3. Consider multiple providers

It is a good idea to obtain reports from more than one credit reporting agency if your company is looking at partnerships that are high-risk or critical, as this offers a more robust and cross-verified perspective.

4. Establish direct contact

Try your best to engage with the finance or credit department of your potential business partner, as this will provide you with direct insights and will help you build rapport early on.

5. Verify information independently

Make sure that you cross-reference information obtained from international company credit checks with information that is publicly available. This could be websites, news articles or industry publications.

6. Monitor ongoing relationships

You need to ensure that you continue to re-evaluate the credit reports of all business partners of customers so that you are able to identify any potential risks or changes to their financial health.

7. Seek professional advice

If you are new to a particular international market and are dealing with complicated situations, consider consulting with finance professionals, legal advisors or credit management experts who know the international market.

8. Implement clear credit policies

Before expending credit to international partners, make sure that you define your company’s internal policies, including maximum credit limits, payment terms and the process for escalating overdue accounts.

9. Consider credit insurance

You may also want to investigate credit insurance for high-value international transactions, as this can help protect you against any non-payment risks, providing you with a vital safety net.

International company credit checks are crucial in being able to ensure profitability and security when dealing with international business partners. When you understand the financial position of your international partners, you’re more able to make informed decisions which will enable you to prevent major losses.

For more information on international company credit checks, get in touch with our team of experts at Creditserve today on 01992 414222.