Commercial credit reporting is the issuing of information about a company’s credit and bill-paying history, drawn from databases maintained on all companies and provided to potential creditors. Some of the same companies that provide consumer credit reports also provide commercial credit reports, but there are other companies worldwide dedicated to commercial credit reporting that don’t get involved in consumer credit reporting. Reliable commercial credit reporting is absolutely critical to commerce worldwide.
Nine major credit rating agencies (CRAs) operate worldwide; three of them, called the Big Three, are headquartered in the United States. As is the case with most industries, there are start-ups trying to establish themselves, sometimes by offering different approaches to commercial credit reporting, but it’s a very hard industry to break into. The members of the Big Three each maintain data on hundreds of millions of companies worldwide, numbers that far outstrip the capabilities of the start-ups.
Commercial credit reporting is used by companies that are considering doing business with other companies. It can help them to determine, for instance, how reliably a company pays its bills and what credit terms to offer. The CRAs gather the data from a number of different sources, often relying on self-reported data from the companies in the database. The data is validated by periodic random surveys.
Commercial credit reporting is also relied on by lenders and investors to determine the risk associated with investing in a particular company. For some smaller companies, these reports are very similar to the consumer credit reports requested by lenders when individuals apply for credit, such as real estate loans or automobile loans. The credit reports issued on larger companies can be quite long and complex, though, as they may be used to help investors decide whether to purchase debt like corporate bonds.
There is an ongoing controversy over the value of CRAs. Their reliability in issuing standard credit reports for purposes of doing business, such as buying and selling supplies and equipment, not been strongly challenged, but their failure to alert the investment community to the questionable financial conditions of many companies that ultimately failed has shaken the community’s faith in their value. Enron, the energy giant that collapsed in late 2001, was rated an excellent investment and credit risk until less than a week before it declared bankruptcy. AIG, the world’s largest insurer, likewise had an excellent rating until the day before its precarious finances forced it to accept a huge bailout from the Federal Reserve Bank. Other troubling stories abound, such as their downgrading of the ratings of companies that refused to pay them for more favorable ratings. One of the consequences of the recession of 2008-2009 was a Congressionally-ordered investigation into the role of CRAs in the crisis.
