9 Reasons Why You Should Credit Check Your Potential Customer
Why bother with a credit check?
When you extend credit to a business customer, you are basically taking cash out of your business and lending it to them.
Would you lend your own money to a stranger, knowing nothing at all about them?
So why would you do that with your business’s money?
When you don’t know a potential customer’s credit history, there is a risk of being paid late or not being paid at all.
If you knew a customer was about to go bust, would you allow 30 days credit?
If you knew a customer paid their other suppliers very late, would you expect payment on time?
Credit reports collate lots of financial information about a business. They can give you good insights into their ability and willingness to pay on time.
By credit checking your customers, you will be able to identify whether it will be worthwhile doing business with them, which could potentially save your company a great deal of money later on.
There are numerous factors to consider when scoping out potential new customers but checking on their overall creditworthiness really is a crucial check to get right.
Here are nine reasons why you should credit check your potential customer.
Qualify New Sales Opportunities
Sales can be increased, not reduced, by checking credit worthiness because sales efforts can be intensified with sound customers and not wasted on a mass of unknown prospects.
Establish the Correct Legal Entity
Knowing the legal status of your client, sole trader, partnership, limited company etc, and the correct legal (registered) and trading names are crucial. The registered name is essential if you need to take further action to recover late payments.
Can They Afford What They Want to Buy From You?
You very likely have some standard terms which you offer to most, if not all customers.
Running a credit check can help you decide if you need to do something different with this customer so you can say yes to their order when their finances indicate they can’t afford it. That may be requesting cash with order, stage payments or a deposit to cover any upfront costs.
If your customer poses a particularly big risk, consider asking for personal guarantees from the directors of the company. This means that they will be personally responsible for paying the debt should the business be unable to pay you.
You may not be able to agree on a way to reduce the risk. So, the safest course of action, in that case, may be to decline the order.
Get an Idea of How They Pay Their Suppliers
Running a credit check on customers will help you determine whether a customer will pay you on time based on how they are paying their other suppliers.
Understanding their payment patterns will help you to determine the impact to your cash flow, should you proceed with offering them credit terms, and allow you to manage the customer accordingly.
Do They Have Any CCJs?
County Court Judgments (CCJs) are often an indication of an inability, or unwillingness to pay their debts.
Set Credit Limits
Having a clear understanding of just how much a customer can afford allows you to set a limit on how much credit you should extend to them. This should be based on affordability, not how much they want to buy, to make sure your cashflow is protected.
All credit reports will give a recommendation of a maximum credit limit.
There are several benefits to setting credit limits for all your customers, which we will explore in another blog.
Estimate How Long a Business Will Continue Trading
If your business is looking to establish a long-term partnership with another business this information is important. You don’t want to invest in a business relationship and then have it end because your partner went under. A credit check allows you to determine the health, viability, and sustainability of a potential long-term partner.
Avoid Bad Debt
By running a credit check on a customer, you will be able to find out their creditworthiness and their likelihood of paying the debt. This means that your business can avoid the nightmare that is bad debt.
Maintain a Positive Cash Flow
All the above will help you to maintain a positive cash flow.
To maintain this positive cash flow, you need accurate data and reporting that supports greater predictability. The better you can predict when you’ll get paid, the better you can plan.
The creditworthiness and credit limits you set will also assist in generating reliable cash flow as your business can make strategic decisions to target the right prospects who are most likely to become fast-paying customers.
Of course, it is important to bear in mind that a favourable credit check will not entirely guarantee that the customer in question will consistently pay you on time in the future, but it will at least give you some reassurance and a clearer insight into their past financial conduct.
It’s Not a One Time Only Thing
Don’t just credit check your customers as a one-off exercise – make it a regular part of your business process, because their circumstances can change and so, too, can their ability to pay.
Some credit reference agencies offer monitoring, which will alert you if your customers’ financial circumstances change, which can help you be more responsive to these changes, be they positive of negative.
Talk to us about setting up credit checking and monitoring your customers’ financial health. Book a call with Nicki here.