Large industries, particularly those involved in distribution of goods, regularly extend credit agreements to their customers. These agreements are often among the distributor and other businesses and can involve very large sums of money. As several competing businesses within an industry may have dealings with the same client, it is beneficial for all those companies to know the payment practices of that client. Often, these companies will create a credit circle as a means of sharing that information.
A credit circle offers additional advantages to a traditional credit check. Most importantly, the circle can have access to information about a customer's missed payments without the 30- to 90-day lag that is common in credit-reporting agencies. In addition, credit managers often notice subtleties that would not be reported to credit agencies. For example, if a company historically paid its debts in full each month but has begun only paying a percentage, that would be an indicator of financial stress that could be otherwise overlooked.
It is common for a credit circle to meet frequently, sometimes as many as six to 12 times a year. In addition, members of the group have a responsibility to alert others if the typical payment pattern of a common customer suddenly changes. The other members of the circle are then in the position to assess and limit their own risk.
As a credit circle is composed of several competing business, great care should be taken by the group to avoid unethical or even illegal behaviors. Several statutes, including The United Kingdom's 1998 Competition Act, have been enacted to prevent economically harmful and unfair business practices. These laws have established what can and cannot be discussed or agreed upon by the members of credit circles.
Members of credit circles may offer information regarding the specifics of a debtor's payments; they cannot, however, offer opinions on whether or not that debtor should be given credit by other companies. Likewise, customer credit limits and the terms of credit arrangements may not be discussed. In essence, credit circles cannot establish a distributor-wide total credit line for a particular customer.
Additionally, members of a credit circle are prohibited from forming any agreement among members that would provide an unfair business advantage or discourage competition. Agreements to standardize industry prices or employee wages are expressly forbidden. Furthermore, the credit circle as a whole cannot make a joint decision to deny business to any group or individual.