Credit Management Credit Reports
6 mins read

Why real estate businesses need to credit check their trading partners

Real estate industry performance is intrinsically linked to the trading conditions of the housing market. In times of boom, the sales volume for agents increases – driving a swell in available cash flow for all associated businesses. However, as housing prices cool off the margins tighten, and the competition for the dwindling volume intensifies. Your business needs to maintain operations, despite any downswings in market conditions or the performance of sales personnel. Credit checking trading partners safeguards your cash flow in the midst of this volatility.

Why perform a credit check on your trading partners

As outlined in CreditorWatch’s July 2022 Business Risk Index, the market outlook in the property industry is currently tenuous – driven by the tandem of rising interest rates, and a market realignment after huge capital growth. As such, the Business Risk Index indicates 9.2% of customers within the industry are in 60 days arrears or more. These swinging conditions impact such a wide array of professionals within Australia.

Beyond real estate agencies and their sales representatives, this industry also includes conveyancers, valuers, bank professionals and a host of third party suppliers such as photographers, graphic designers and copywriters. The majority have their own back-of-house operations as well, from accounts teams through to administration personnel.

While the previous growth period mentioned has led to healthy balance sheets throughout the industry, it also demonstrates each business’ cash flow dependency on one another. Sales representatives need the houses, so that photographers can take the photos, so that the head office can collect their percentage after sale and pay the full-time operations staff, and so on.

Each link in the chain creates the next income stream. If one link breaks, the viability of every player is at risk, and as the market downturn steepens your risk exposure to bad debt only grows. Credit checking trading partners is essential within this context.

For example – Say you’re a real estate agency, implementing a complex and expensive sales campaign, for off-the-plan apartments within a large new development. The developer is someone your business knows, so you implicitly trust that they have the cash in the bank to pay all associated outgoings. There are various third-party suppliers to coordinate for marketing collateral – from the generation of CGI renderings, to the display suite build, landing page design and specialised printed material. 

You divert your attention away from other commission opportunities to focus on this high-volume sales project, limiting your scope for cash flow elsewhere. Off-the-plan sales commence and each partner business focuses its full time and attention on the execution of the large-scale task.

The problem is: that developer was a credit risk, and had been for a considerable time. While not yet insolvent, they were already in large debt to a number of other creditors. Due to the lack of credit reporting, it is only after they finally declare bankruptcy that you’re made aware of the number of creditors owed, their history of payment failure, and the high-risk profile of the business. The development project, that you worked so tirelessly on, never sees construction completed. 

At this point, it’s extremely unlikely your agency receives any form of commission or compensation. Further, it also negatively impacts the cash flow of all other associated supplier businesses, threatening them with potential insolvency as well. Had you credit checked their company prior to engagement, using the CreditorWatch suite, you would have been able to flag this bad debt potential early and avoid the collateral damage.

CreditorWatch helps real estate businesses credit check customers and suppliers

When dealing with so many interlinking real estate businesses, CreditorWatch provides a wide variety of credit checking tools and safeguards that can assist in protecting your cash flow.

Credit Reports & RiskScore – The base level of cash flow protection for real estate business of all sizes is found within the CreditorWatch credit reporting platform. Each trading partner, from the loan providers through to the photographers, can be credit checked online according to their ABN or ACN.

In our credit reports, an array of useful creditworthiness information is revealed, not least of which is our market-leading predictive technology: RiskScore. It uses three subsets of extensive  data – business demographic risk data, tradeline behavioural data and traditional credit risk drivers. Using machine learning, we generate a numerical credit score between 0-850 for the entity, indicating their likelihood of default within the next 12 months. The higher the score, the lower the credit risk they pose to your business.

Further, the RiskScore ranks entities based on their riskiness, with one of 14 credit ratings, from A1 to F. This intuitive information empowers the decision making for your real estate business. It takes the guesswork out of which partners to do business with, especially in high-volume scenarios.

Beyond this, our credit reporting suite will detail additional insights, including potentially conflictual cross-directorships, and ATO tax default notices. All of this knowledge is power to your business, and it’s delivered in an intuitive way so that you can determine a trading partner’s creditworthiness from a glance.

Ongoing checks & alerts – Within such a high volume industry, impacted by swinging market conditions, you can never be assured of the financial security of a trading partner – even if they have been dependable for a long time. You must continually assess creditworthiness, as previous trading success is no guarantee for the future, and it only takes one bankrupt partner to place your operation at risk of bad debt. Our 24/7 risk monitoring and real-time alerts feature addresses this risk exposure. If any trading partners’ credit conditions change, you’ll be the first to know about it. The more time you have, the higher your chances of mitigating the shock to your cash flow.

Compliance – The world of compliance and regulatory frameworks can be a confusing one to navigate.  CreditorWatch takes the hassle out by ensuring that all appropriate checks are made with our Know Your Customer (KYC) procedures, Anti-Money Laundering (AML) and Ultimate Beneficial Owner (UBO) reports. These checks help to detect and deter criminal activity such as tax evasion and fraud. It also helps your business comply AUSTRAC’s requirements and the AML/CTF Act. Reporting obligations don’t have to be a headache, if you leverage our tools to conduct the appropriate due diligence quickly and accurately.

Financial Risk Assessment – As your cash flow dependence on one particular trading partner grows, you may require further assurances on their creditworthiness. A Financial Risk Assessment from CreditorWatch deep-dives into the past two to three years of company financials, including its income statements, balance sheets and cash flow. Accompanied by an analysis from a qualified Chartered Accountant or Certified Professional Accountant, it provides additional indicators of a trading partner’s credit risk. If the value of the trading relationship is high, especially as a proportion of net revenue, you should seriously consider such an assessment in order to protect your business.

Additional checks with InfoTrack – Beyond creditworthiness, there are other details that you may seek to confirm about a trading partner, that can dictate the nature of the relationship. This includes the verification of their identity, especially if transacting remotely, or assurances about the security of a contract of sale. The real estate industry can be a target for fraud and impersonation, and the additional searches provided by InfoTrack secure your business against these risks. The tools provided allow for additional security checks on trading partners, as well as allowing for a more secure platform for negotiation and transaction.

The real estate market is susceptible to peaks and valleys as the trading conditions, interest rates, and loaning environment changes. With revenue variability, it is essential that every trading partner is creditworthy and dependable. Speak to our team today for a free demo on how you can better protect your cash flow.

realestate tradingpartners
Francis Morello
Senior Business Development Manager
Francis joined CreditorWatch in October 2019. He is passionate about empowering business owners to enhance their due diligence and mitigate trade credit/supplier risk by receiving alerts on adverse changes on company credit files and financial risk assessments and a better understanding of director acumen. Francis has a special interest in leverage experience to enable other real estate organisations to minimise commercial/industrial landlord-related risks.
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