Why businesses should credit check new customers

If your business provides products or services, chances are you invoice on completion of service or delivery. Unlike those who receive payment up front, the way you run your business means you are effectively extending a line of credit (and good will) to your customers. A credit check is a simple and effective way to give you the confidence that these customers can pay their invoices.

There are a number of ways you can check the credit history of a new customer, although since 2014, Australian businesses now have even more complete information to review their customer’s history via the adoption of the comprehensive credit reporting (CCR) system. This new reporting system incorporates both positive and negative information, providing a more accurate representation of an individual’s or business’s credit history and behavior – reducing the potential risk of on-boarding high risk customers.

 

Before we outline how to credit check a customer, we feel it’s essential to inform you that it’s important to get your customer’s permission before undertaking any of the below.

 

Secure a credit report on potential new customers

With many credit report providers out there today, it’s very easy to secure a copy on a new or prospective customer. A credit report provides the following;

• Past payment data.
• Bankruptcy records.
• Any legal proceedings in place against a company.
• An overall risk rating on how likely a customer is to pay their bills on time.

 

Running a credit check will help you;

• Assess the risk of extending credit to a customer.
• Give you a clear picture of your customer’s payment habits.
• Qualify new sales opportunities.

 

You can run a credit check on an individual, a business or both. While some companies only run a credit check on new customers, it’s important to stay up to speed with the credit health of your entire customer database. Schedule these in regularly, be it with renewal of services or contract or on an 18-month basis.

 

References

Securing a credit report is generally the first step in reviewing a new customers ability to pay invoices, however if you aware of other companies they have dealt with in the past you should contact them and get first hand references. Although potentially less reliable, the more information you have on new or prospective customers the better.

 

Check publicly available information

Depending on the size and type of company, information like financial statements are readily available to the public which can provide a clear indication of their financial status and ability to service any debt they incur with your business.

 

Take out credit insurance

Whilst reviewing a customer’s credit history to assess the associated risk of conducting business is essential, taking out credit insurance is a great preventative measure to protect your business against overdue accounts, covering you for any outstanding money owed to you by customers.

This is a safeguard in the truest sense: even if a company goes bankrupt or into liquidations, your business will be able to carry on operating.

An added bonus of credit insurance lies in the professional alliance it offered you: the policy provider will be sure to extensively investigate the credit health of both your new and existing customers, protecting both your interest and their own. Often, these investigations will be ongoing so you constantly have a snapshot of your customers’ financial position as the relationship develops.

 

For all new customers:

• Keep your invoicing terms tight. 14 day terms are better than 30-day terms, for example.
• Try payment installments to get a better idea of their credit behavior. For example, make it standard protocol to request an upfront deposit and then installment payments. It might be a little more admin on your behalf but it may very well be worth it: not only will this assist your cash flow, but it will ensure that you are being paid as you go.
• Stay up to speed on economic news and industry pressure. Be on top of any potential squeezes or pressures that might make it difficult for your customers to pay their bills. If there are pressures on the horizon, you may want to be extra vigilant in your credit terms offered.

 

Credit checking all new customers will ensure your business is vigilant when it comes to who you are going into business with. Be sure to set up systems and processes to ensure you stay on top of your customers’ credit health, as it directly affects the health of your business’s own cash flow and future.