| Access to credit has been a key part of businesses | | | | ABC Company rather than providing available cash up |
| since medieval times. In medieval Europe, the | | | | front. |
| societies of England and Italy used "forward | | | | Making an Informed Decision |
| contracts" in order to repay cash loans in wool. | | | | Often the ABC Company will be open to providing |
| Investment is an important part of any business and | | | | credit to XYZ Ltd. Often there is going to be some |
| many owners don't have the cash required to | | | | kind of down payment along with terms of either |
| capitalize on a venture or underwrite new products. | | | | "net 30" or "net 60" that are due upon delivery of |
| However, there is some risk involved in providing | | | | the computer chips. As the creditor, ABC Company |
| credit. Sometimes an account is paid late or goes into | | | | often won't have an interest on the account |
| default. In order to reduce the risk involved, business | | | | according to the contract terms of 30 or 60 days, |
| owners need to consider credit risk management | | | | but there may be interest attached to late |
| before they offer credit to clients or partners. | | | | payments. |
| There is a very real risk to the process of offering | | | | So how can ABC Company be sure they are making |
| credit. With today's economy, any small mistake can | | | | a wide decision to extend credit to XYZ Ltd? Getting |
| prove costly. For example, if ABC Company | | | | an account's credit report is the best way to |
| manufactures computer chips in the United States | | | | determine credit risk management. A credit report |
| and is contacted by XYZ Ltd from India who wants | | | | for a business will often include financial and |
| to order ten million dollars worth for a new project? | | | | payment-history information that is often unavailable. |
| While this is a good deal for the ABC Company, they | | | | This report is a vital part of making wise business |
| also need to be careful since they don't know a lot | | | | decisions. |
| about XYZ Ltd. There is no history between the | | | | The business credit report is useful because it offers |
| companies and there is no way to tell if XYZ Ltd is | | | | accurate and up-to-date information on a company's |
| going to honor their contract or have the means to | | | | credit history as well as background information on all |
| repay the bill. | | | | major shareholders, top management, balance sheets |
| This means that the ABC Company has two options. | | | | and bank information. The credit report provides |
| First, they can require cash payment up front with | | | | everything a business needs in order to completely |
| the balance due upon delivery. In this type of a | | | | understand the strength of a potential financial |
| transaction, the client will lose their deposit if they are | | | | account. |
| unable to repay the balance while ABC will be able to | | | | All businesses require credit in order to operate and |
| sell the computer chips to someone else. However, | | | | most companies do what they can to have a good |
| this type of transaction is actually rare in the business | | | | rating. This makes it easier to gain credit from |
| world today. Today, credit is often the chosen | | | | vendors. This process allows both businesses to have |
| method because of its specific benefits. After | | | | success. ABC Company has the reassurance that |
| purchasing the chips, XYZ Ltd is going to increase | | | | they are providing credit to a client that is |
| their value by selling a finished product and earning a | | | | trustworthy while XYZ Ltd is getting the credit it |
| profit. XYZ Ltd will use these profits to repay the | | | | needs because of its good credit rating. |