Performing a credit check on the owner of a small enterprise can be a prudent step in certain situations, but it’s essential to consider legal and ethical aspects and to ensure that it’s relevant to the business relationship. Here are some factors to consider when deciding whether to check the owner’s credit score as part of your credit due diligence:
Relevance to the Business: If the owner’s personal creditworthiness directly affects the business’ financial stability, such as in a sole proprietorship or a small business where personal and business finances are intertwined, checking the owner’s credit score can be very relevant.
Credit Risk Confirmation: If you’re dealing with a high-value transaction, conducting a credit check on the owner could provide additional insights that will either give you peace of mind as to the level of credit being extended, or requiring the order be paid in advance.
Nature of the Business Relationship: For significant and/or long-term contracts, especially those involving credit extensions, a credit check might be more justifiable compared to a one-time small transaction.
Communication and Transparency: It’s essential to communicate clearly with the business owner about the reasons for conducting a credit check and to be transparent about how the information will be used. This transparency helps in building trust, especially in small business relationships.
Legal and Ethical Considerations: Before conducting any credit checks, it’s crucial to comply with local, state, and national laws regarding consumer privacy and credit reporting. Ensure you have the proper consent and authorization from the individual to perform a credit check.
While checking the owner’s credit score can be a valuable part of due diligence in specific situations, it should be done cautiously, ethically, and legally. Assess the relevance of this information to evaluating the company’s creditworthiness before making a decision.
Your comments are most welcome.
Nancy Seiverd, President, CMI Credit Mediators, Inc. (nseiverd@cmiweb.com)
