What Is a Credit Investigation (Credit Check)? Basics of Investigations and Tips for Cost Reduction! | Blog

What Is a Credit Investigation?

A credit investigation involves evaluating the reliability and creditworthiness of a business partner or individual by examining their financial status, management condition, and transaction history.
Investigations conducted primarily to assess a partner's reliability and solvency are referred to as "Credit Investigations," while checks to ensure there are no ties to anti-social forces or criminal organizations are known as "Anti-Social Force Checks."

To maintain stable business operations, it is essential to investigate in advance whether a business partner has the capacity to pay and whether there is a risk of a sudden decline in their creditworthiness. Furthermore, involvement with anti-social forces can negatively impact a company's reputation and credibility, and may lead to significant legal risks. Therefore, the purpose of conducting credit investigations is to verify in advance that there are no factors that could negatively affect your company.

Risks of Not Conducting Credit Investigations

Credit investigation is an essential process for evaluating the reliability of a business partner and maintaining stable operations. Proceeding with business activities without conducting credit investigations can lead to various risks.

Financial Risks

If you begin a transaction without clear information regarding a partner company's management status or financial health, you risk the partner's potential inability to pay. This can lead to outstanding accounts payable or receivable, which may deteriorate your company's cash flow and negatively impact your operating capital.

Supply Chain Risks

If a business partner faces financial difficulties, there is a risk that they may be unable to provide services normally, leading to sudden production stoppages, supply shortages, or a decline in quality.

Reputational Risks

If a business partner is found to be involved in fraudulent activities, corruption, or associations with anti-social forces, your company's reputation could be severely damaged. Should you become involved in legal issues or litigation, the resulting costs, time, and operational burden would place a significant strain on your organization.

Methods of Credit Investigation

Credit investigation methods are broadly categorized into four types: Internal Investigation, Direct Investigation, External Investigation, and Outsourced Investigation.

Internal Investigation

Internal Investigation, also known as in-house research, involves conducting credit assessments by leveraging information and data already held by your company. This includes gathering past transaction histories and records of payment delays from internal databases to inform credit evaluations. In some cases, it may also involve direct communication with the target company to gather information regarding their reliability and risk management policies.

Direct Investigation

Direct Investigation is the process of collecting information directly from the target company. Common methods include surveys, inquiries, and dialogues conducted via telephone, fax, or email. This approach is used to gain a more detailed understanding of the counterparty's financial status and creditworthiness.

External Investigation

When collecting information from sources other than the target company itself, methods include government agency research and internet-based external investigations. Government agency research involves obtaining information from commercial or real estate registries, while internet-based research involves gathering data from online media and other digital sources.

Outsourced Investigation

Outsourced Investigation refers to commissioning a third party, such as a specialized credit reporting agency or investigation firm, to conduct credit checks on business partners. This method is particularly useful for obtaining information that is difficult to acquire independently, helping to mitigate transaction risks through professional expertise.

Credit investigations are conducted by combining the necessary elements from the four methods mentioned above. By utilizing multiple approaches whenever possible, you can achieve a comprehensive and highly reliable assessment, thereby minimizing credit risk.

Pros and Cons of Using Credit Reporting Agencies

Credit reporting agencies are specialized organizations that collect and analyze corporate credit information and provide it to businesses. It is widely known that companies utilize these specialized agencies when conducting credit investigations or anti-social force checks. This article explains the pros and cons of using credit reporting agencies.

Pros of Using Credit Reporting Agencies

The primary advantage of using a credit reporting agency is the high reliability of the information obtained. You can acquire a wide range of corporate data, including basic information such as capital and number of employees, as well as payment delay records and credit ratings.

Cons of Using Credit Reporting Agencies

While credit reporting agencies allow for the high-precision collection of extensive credit information, they do incur costs. You must consider these investigation fees, especially when you need to screen a large number of companies.
Additionally, for new investigations where the target company is not already registered, it typically takes about a month or more to complete the report. In some cases, additional fees may be required to expedite the investigation period.

What Is a Primary Credit Check?

There are steps you can take internally before engaging a credit reporting agency. This is known as a primary credit check. To reduce costs, it is important to conduct an internal primary check before requesting an investigation from a credit reporting agency.

Verify the Corporate Registry

Because it is legally impossible to include false information in a corporate registry, it serves as a highly effective source for verifying a company's creditworthiness. Methods for checking the registry include requesting a certificate of registered matters at a Legal Affairs Bureau counter or by mail, or using an online registry information service. Since all these methods incur costs, you should select and obtain only the necessary information based on your objectives to keep investigation expenses down.

Conduct Internet Research

You can conduct investigations by searching for industry-specific negative keywords. Searches are performed by combining the company name or representative's name with terms such as "organized crime," "arrest," "reputation," or "violation."

Since there are various types of negative keywords, it is necessary to establish internal rules for the keywords used during investigations and share them across the team. While you can refer to official websites or industry news pages, you should consult with a professional organization if you find it difficult to interpret or make judgments based on the information obtained through internet searches.

Conduct On-Site Investigations

Another method is to visit the target company in person. This has the advantage of allowing you to observe the demeanor of senior management and employees, as well as the condition of office equipment and facilities, making it easier to grasp the actual situation.

If you intend to continue business with them, maintaining current trust is important. Therefore, when visiting or conducting interviews, you must exercise extreme caution and consideration to ensure they do not realize they are being investigated. Additionally, direct on-site investigations are difficult if the target company is located far away.

Utilize Corporate Databases

You can also conduct credit checks by utilizing corporate databases. "uSonar," which is based on LBC, the largest corporate database in Japan, enables simplified credit checks by allowing you to verify unique credit scores alongside a database of companies requiring caution.

The Importance of Primary Credit Checks

Primary credit checks are essential for reducing time and financial costs. Outsourcing all credit investigations to a reporting agency is both expensive and time-consuming. By first conducting an internal primary check and only requesting investigations from the agency for information that could not be gathered internally, you can conduct credit checks efficiently.

Furthermore, data shows that very few companies actually go bankrupt even if they appear to have credit issues.
When using uSonar's database of companies requiring caution or credit scores during your primary check, establishing internal rules is key. For companies that meet a certain rating, proceeding with transactions based on the primary check results is a viable strategy.

Features of "uSonar": Reducing Risk Check Costs by 90%

Accurate and efficient primary checks are indispensable when investigating the creditworthiness of business partners.
"uSonar" is a groundbreaking service that accelerates primary credit checks and significantly reduces costs.

uSonar's database is composed of diverse information sources, including commercial registration data, corporate data, administrative action history, and over 30 years of newspaper and news archives. This enables the early detection of potential risks in business partners and the implementation of appropriate countermeasures.

Furthermore, by leveraging AI-driven analysis, the system automatically extracts signs of risk from vast amounts of data. This significantly reduces the time and cost compared to traditional manual investigations.

By using "uSonar," you can reduce risk check costs by up to 90% while achieving highly reliable primary checks. This allows companies to conduct business efficiently and safely.
Please check below for more details.