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  • Writer's pictureFair Capital

Is That Business Legit? Unmasking Risky US Companies Before You Extend Credit

Updated: Mar 21

What you need to know before extending credit to a US business

Before entrusting your hard-earned money to a US company, a crucial first step is essential: due diligence.

This isn't about paranoia; it's about reducing risk. The American market, for all its vibrancy, operates with a decentralized structure. Unlike some countries with centralized business registries, verifying a company's legitimacy often requires venturing beyond a single source.

Here's a comprehensive guide to equip you for success in the US marketplace:

Pre-engagement Checks:

  • Make sure it's a legitimate company:  Each state maintains a website for its Secretary of State's office. This virtual treasure trove allows you to verify a company's legal existence and good standing. Search for the company name and business entity type (corporation, LLC, etc.) This will reveal basic information such as registration date, registered agent, and business address.

  • Business credit check:  A business credit check can be a powerful tool. For a nominal fee, credit reporting agencies provide reports that reveal a company's payment history with vendors, outstanding debts, and potential liens. Just like a good credit score for an individual, a healthy business credit report indicates a financially responsible partner.This can expose red flags like late payments or a maxed-out credit line, indicating potential trouble meeting future obligations. Below are some commercial credit bureaus that you can use to check the credit of any business. Dun & Bradstreet Creditsafe Experian

  • Company Website:  In today's digital age, a professional, up-to-date website is a baseline expectation. A well-designed site with clear contact information, detailed information about products or services, and a presence on social media platforms fosters trust. Conversely, poorly designed sites with limited content, broken links, or missing contact details raise red flags.

  • Online Reviews and News Articles:  The internet empowers consumers and business partners to share their experiences. Platforms like Google My Business, Yelp, and industry-specific review sites can provide valuable insights. While a few negative reviews shouldn't be an automatic deal-breaker, a consistent pattern of complaints about customer service, product quality, or payment delays warrants caution. Similarly, news articles about the company, both positive and negative, can offer valuable context.

  • References:  Don't be afraid to ask for references. A reputable company should be happy to provide a list of satisfied customers or business partners. Contact these references and ask about their payment history, communication style, and overall experience working with the company.

  • Financial Statements:  For significant transactions, requesting to see a company's financial statements is a prudent step. These documents, which may include a balance sheet, income statement, and cash flow statement, provide a window into the company's financial health, debts, and assets. While you may not be a financial expert, significant discrepancies or a lack of transparency can be cause for concern.

  • Industry Reputation:  Research the company's reputation within its specific industry. Are they known for ethical practices, timely payments, and quality products or services? Industry publications, trade associations, and online forums can be valuable sources of information.

  • Licensing and Permits:  Ensure the company possesses the necessary licenses and permits to operate legally in its industry and location. Many local and state government websites allow you to search for businesses by license type and ensure compliance.

  • Engaging Professionals: For complex transactions or high-risk ventures, consider engaging the services of a business attorney or a financial advisor. These professionals can guide you through the due diligence process, review contracts, and identify potential red flags.

By following these steps, you can navigate the US business landscape with confidence. Remember, a little due diligence upfront can save you a lot of heartache (and money) down the road. After all, in the world of business, information is the ultimate weapon.


Disclaimer: Any and all information is not intended to be, nor is it, legal advice. Please consult your attorney for information concerning allowable rates of interest.

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