How to check a potential client's credit score
The law allows you to check a small-business owner's credit score in several instances
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com. Her book, “The Million-Dollar, One-Person Business,” was released in 2018. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
How can I check a potential client's credit score?
Checking a potential client's credit score is very easy.
In fact, all major credit bureaus have dedicated online tools to do so. Just make sure to follow the Fair Credit Reporting Act rules.
Dear Your Business Credit,
I am thinking of taking on a new client at my small business. He would like us to extend credit to his small firm.
How can I check his credit score? – Steve
You’re smart to do your homework before extending credit. Nothing is more of a headache and challenge to cash flow for small-business owners than collecting from clients who don’t pay on time.
See related: How to check a small business credit report
How to check a small business’s credit score
Checking a potential client’s credit score is very easy. The three major credit bureaus each enable you to do this.
- Experian’s business credit scores.
- Equifax’s business credit reports.
- TransUnion’s business credit risk scores.
- In addition, you can check your client’s business credit score at Dun & Bradstreet.
It probably is not necessary to check all four, so I would pick whichever one seems most user-friendly to you.
Now here’s the challenging part. The vast majority of small businesses in the U.S. are nonemployer businesses. This is what the government calls firms that have no employees other than the owners. They may be run by a single individual or one or more partners.
When you need to check a client's personal credit report
Many owners of these businesses have not set up a formal business entity and instead operate as sole proprietors, doing business under the owner’s name, rather than forming an LLC or corporation.
Sometimes this is because the owners are new to running the business and are not sure they want to commit to doing so for the long term.
For instance, a professional who lost a corporate job and is consulting until he finds another one might not form an entity.
In other cases, the owners prefer to operate the business informally. Sometimes, they don’t want to invest the time and money in setting one up.
If that’s the case with this client, you will be hard pressed to find information on their firm’s credit score.
You may need to check his personal credit reports instead.
Tip: Experian has published a helpful article on how a sole proprietor’s credit is evaluated by lenders that is worth reading.
Before you pull someone’s consumer credit reports, make sure you know the rules for doing so, as per the Fair Credit Reporting Act.
As Experian noted in a recent article, these are the circumstances in which you can secure someone else’s credit profile:
- In accordance with the potential borrower’s written instructions.
- In response to a court order or federal grand jury subpoena.
- To manage the risk of current or potential credit or insurance accounts the potential borrower has initiated.
- For employment purposes, with the potential borrower’s written permission.
- So a potential investor may assess the risk of a current obligation.
- In connection with a potential borrower’s application for a license or other benefit granted by the government, when the law requires consideration of financial responsibility.
- In connection with a business transaction the potential borrower has initiated.
- In connection with a child support determination, in certain situations.
- In connection with a credit or insurance transaction not initiated by the potential borrower, when the lender has extended a "firm offer" of credit or insurance and certain restrictions are met.
How to ask a client permission to check their credit
If you think other customers may request credit in the future, the simplest way to address this is to have your attorney draft a form for them to sign that gives you permission to pull their credit report or buy a boilerplate version from a site that sells business forms.
Just be careful when you extend credit and trust your instincts. Never extend so much credit that you would not be able to pay your bills on time or at all if a customer was late in paying you.
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