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Your eCommerce brand may have thought about credit checking other businesses, such as to get a business credit report, but you may be unsure whether this is necessary. A credit check is where you assess a business’ financial ability and behaviour as a business owner or another company. This exposes any risk in working with them. It can reveal debts and legal issues, such as County Court Judgments (CCJs).
You can check the business credit of small businesses you sell your goods or services to and also those you purchase from. For example, your suppliers’ credit and payment histories towards business loans. This article will explain why your eCommerce business should carry out credit checks for their credit risk or credit reports, such as for obtaining a business credit score.
Why Should I Credit Check?
Your eCommerce business should check other companies it may wish to work with. There are several reasons your internet business should do this, and we look at some of these here.
Legitimate Business
Carrying out a credit check on a business you may work with will let you know if it is legitimate. This gives you some indication as to whether the company is safe for your eCommerce brand to operate with.
For example, when engaging in business-to-business sales, you will likely sign a contract, which is a legally binding document. Knowing that the business is legitimate and safe can reassure you that they may be more likely to adhere to this. Equally, if they do not adhere to it, knowing they are a legitimate business means you know they are more likely to cooperate with any future legal action.
Also, when you know a business is legitimate, you are more likely to trust them. This means you reduce the risk of your eCommerce business working with fraudulent companies, which could lead your business to legal issues.
Avoid Debt
A key reason your eCommerce business should credit check other companies is because it helps your online business to reduce the risk of debt. No eCommerce business wants to be in a situation where they face another business owing them money. It can be challenging to recover debt; it can be a long and expensive process, particularly if you need to take them to court. Also, it can increase the chance of your online business failing, leading to legal issues, such as insolvency.
A credit check, however, will inform you about the business’s financial position, allowing you to understand the risk doing business with them poses. A significant factor a credit check reveals are warnings about a business, such as:
- outstanding debts;
- if the company has even been insolvent;
- previous bad credit in the past; and
- bad financial records.
Cashflow
Although a credit check on a business helps your eCommerce business avoid debt, it also helps prevent businesses that pay but are slack at paying on time.
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If, for example, you are a small online business, prompt payments are essential for your cash flow. You rely on a steady cash flow to honour your legal commitments with other companies. If you cannot make your payments on time, your reputation as an online brand can be affected.
Protection
In addition to the reasons above, your eCommerce business may credit check other companies to protect your business. You probably associate credit-checking firms with those who wish to purchase from your eCommerce brand.
Key Takeaways
A credit check allows you to understand the financial risk a business may pose to work with. As an eCommerce brand, you might wish to credit-check enterprises you work with. There are many reasons for this, and this article has explained some of them. For example, to ensure that the business you work with is legitimate.
Also, a credit check can help your business avoid debt. The credit check lets you understand how quickly a company pays its invoices. Another reason to credit check business is to ensure that those who supply you regularly are likely to continue to do so. This prevents you from getting into legal problems later down the line.
If you need help understanding why your eCommerce business should credit check others, LegalVision’s experienced eCommerce lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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