Credit report: how to assess a business relationship

Requesting a credit report: what it does and does not say about a business relationship

Before entering into a major contract, selecting a supplier, or extending payment terms, it is wise to assess the financial health of the counterparty. A credit report from a specialized provider is the most accessible tool for this purpose. However, entrepreneurs frequently underestimate what such a report can and cannot reveal, and how to utilize the findings legally and commercially.

What is in a credit report

A standard report from providers such as Graydon, Dun & Bradstreet, Creditsafe, or Altares typically contains data from the Dutch Chamber of Commerce, filed annual accounts, payment behavior based on anonymized signals from creditors, and any negative registrations such as bankruptcy applications, suspensions of payments, and payment arrears. In addition, they offer their own scoring model that expresses creditworthiness in a rating or a recommended credit limit.

For sole proprietorships and general partnerships, information is scarcer because there is no obligation to file. The entrepreneur is then personally liable, which is usually stated in a credit report. For private limited companies (BVs), the filed annual accounts provide insight into solvency, liquidity, and equity, although small enterprises may suffice with a concise balance sheet pursuant to Title 9, Book 2 of the Dutch Civil Code, resulting in limited insight.

What a credit report doesn't see

The limitations are at least as important as the content. A credit report does not see ongoing disputes that have not yet resulted in a judgment, verbal agreements with crucial customers or suppliers, subordinated loans to the director-major shareholder that distort the picture on the balance sheet, or impending contract termination by a major customer. The financial statements to which the report often refers are typically twelve to eighteen months old and therefore provide an outdated picture for rapidly changing companies.

Moreover, a high rating says nothing about integrity or reliability. A company with a healthy balance sheet can still intentionally underperform, and a company with a mediocre balance sheet can be an excellent payer. The report is a tool, not a judgment.

How you use the findings legally and commercially

In the event of indications of limited creditworthiness, it is important to strengthen the legal starting position. This can be done through advance payment, prepayment, retention of title pursuant to Article 3:92 of the Dutch Civil Code, joint and several liability of directors or the parent company, personal guarantee by the director-major shareholder with the consent of the partner pursuant to Article 1:88 of the Dutch Civil Code, or a bank guarantee or escrow.

In contractual documentation, you can incorporate termination options in the event of a deterioration of the financial situation (financial covenants), and term shortening with immediate enforceability upon exceeding certain ratios. For long-term B2B relationships, a periodic credit check is advisable, not only prior to the first delivery.

When conducting your own due diligence is advisable

For larger transactions, long-term commitments, or business acquisitions, a credit report is insufficient. In such cases, a legal and financial due diligence investigation is warranted, in which contractual obligations, ongoing disputes, tax positions, employment obligations, and legal ownership structures are scrutinized. A credit report serves as a useful starting point in this process, not the final step.

Follow-up action

Are you unsure about the creditworthiness of a business partner, or do you wish to strengthen your legal position before entering into a major assignment? Our lawyers review contracts, terms, and securities, and advise on the most effective combination of safeguards. Prevention is cheaper than litigation.