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If your business provides credit, you are inviting an element of risk into your commercial engagements. Your business success relies on your customers paying their debt on time. Therefore, you should conduct due diligence about the person you are providing credit for to ensure that you are making a prudent investment. One way to reduce risk is to check the credit score of the individual or entity you are about to do business with. When you have a legitimate purpose, you can check the credit scores of:

  • your customers; 
  • other businesses; and
  • potential employees.

This article will go through how you can check your business debtors’ credit scores in New Zealand.

What Do Credit Scores Show?

A credit score is a number that represents a person or company’s creditworthiness. This credit score is usually a number between 0-1000, with lower numbers indicating worse credit. A good credit score usually falls between 500-700, and this number indicates your debtors’ likelihood to keep up with their payments.

Based on various algorithms and calculations, the value of a credit score takes into account the entity’s:

  • payment history;
  • credit cards or loan details;
  • money owed;
  • past credit checks;
  • length of credit history;
  • past credit history, such as utilities or mortgages;
  • overdrafts;
  • bankruptcies;
  • court judgments;
  • payment defaults;
  • missed debt repayments, such as missed bills; 
  • securities on the Personal Property Securities Register (PPSR); and
  • credit applications.

For example, if a customer has a history of repeatedly failing to pay their debt on time, this will lower their credit score. Checking your credit record multiple times can also lead to a lower score.

This score relies on information about repaying debts for the past two years and any outstanding debt recovery attempts in the past five years. Important information, such as identification details and multiple bankruptcies, remain attached to this score indefinitely.

When Should I Check a Debtor’s Credit Score?

If your business provides credit, it is generally good practice to check the credit scores of whoever you give this credit to. You may provide credit if you deal with:

  • mortgages;
  • personal or business loans;
  • investment opportunities;
  • hire purchase agreements or credit sales;
  • phone contracts;
  • car finance; or
  • establishing new credit cards.

You need to get the written consent of the party you are investigating in most cases unless you are a public sector agency or debt collector. 

It may be more efficient to run a quotation inquiry instead of a credit check in some cases. This is when you provide a preliminary quote of any loan terms for your debtor before you enter contractual relations. It will vary, but you will still be able to access your potential debtor’s relevant financial information to determine the value of the quote. Such an inquiry does not affect the value of a future credit score. If you use risk-based pricing, you need to conduct quotation inquiries instead of credit checks. This is where you charge higher interest rates on riskier engagements.

How Can I Check My Business Debtors’ Credit Score?

If you want to check the credit score of a potential business debtor or another party, you can apply for a credit report detailing this score through a specialist company. This report may also include other relevant financial/credit information. The main credit reporting agencies in New Zealand are:

  • Equifax;
  • Centrix; and
  • Illion.

They all provide different services for various fees, so be sure to compare and find one that suits your needs. Such services include:

  • consumer alerts;
  • credit enquiries;
  • debt recovery scores;
  • business consulting;
  • credit data analytics; or
  • portfolio health checks.

For example, one service they may offer is sending you alerts when a particular party’s credit score changes, as well as business and consumer credit reports.

When obtaining a credit report, ensure that you have the correct identification details and contact information of the entity you want to investigate. This can be challenging when you want to investigate a company or trust’s credit score rather than an individual’s, so be sure you have up to date information. If you come across a low credit score, discuss it with your potential debtor, and they may be able to provide an adequate explanation. When there are doubts over the debtor’s ability to pay their debts, or if you are worried about late payments, it may be prudent to ask for a personal guarantee.

Tip: Any credit information you retain about a customer or other business debtor will likely qualify as personal information. You need to make sure you only disclose this information with the necessary team members and protect it adequately.

Key Takeaways

If you are about to provide credit for a new business debtor, it is generally a good idea to conduct any necessary background checks on the other party. One of these checks is applying for a credit report from a specialist agency and confirming their credit scores. If you would like more information or help with checking your business debtors’ credit scores, contact LegalVision’s regulatory and compliance lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is credit?

Credit is when you allow a business debtor to receive goods or services before paying fully, incurring debt to your business.

What is a credit score?

A credit score is a number, usually between 0-1000, that represents an individual’s (or company’s) creditworthiness.

What is a credit report?

A credit report is a financial summary that a specialist credit reporting agency may provide your business. Credit reports outline past credit history, money owed and whether debt was paid on time.

How can I check my customers’ credit scores?

If you want to check a person’s credit score, you need to get their consent in most cases. When you have their consent, you can apply to a specialist agency to compile a credit report detailing the relevant credit score.

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