Credit Checks: It’s Better To Be Safe Than Sorry

It’s exciting to get new customers – but not if they fail to pay invoices on time or worse yet, not at all. This will have a negative impact on cash flow, potentially harming the business.

If you run a cash business, credit checks aren’t unusual. If you extend credit by invoicing after goods or services are provided, the only way to determine if a new customer is a reliable payor is to perform a credit check first. Before extending any form of credit to a new customer, take these steps to verify their credit history and determine the amount and terms under which to extend credit.

The first step is to create and use a credit application form. The form you use can be as simple as a one-page document listing contact information, bank, and trade references. Remember, your goal is to collect sufficient information about the customer, so you can make an informed decision about whether to extend credit.

Here’s how:

Get written permission from the customer to allow its banks and vendors to release payment and balance information to you.

Get names and contact information from at least three vendors. Obtain contact information for vendors who have established long-term business relationships with your new or potential customer.

Obtain contact information for banks with which the customer currently has an account. Ask for contact information for specific individuals at those banks to ensure you speak with someone familiar with the customer. To be even more thorough, take it a step further and ask for references from previous banks. Talking to those contacts provides a more comprehensive picture of a new customer’s creditworthiness.

Call the customer’s vendors. Request accounts receivable information and ask vendors to verify the customer’s payment history. If the vendor requires written authorization to release information, send a copy of the signed authorization from the new customer. Pay special attention to any comments about late payments.

Call the customer’s banks. Verify the length of the business relationship and details about the customer’s balance history. If a bank requires written authorization to release information, send a copy of the signed authorization from the customer. Look for comments about dramatic fluctuations in account balances, which may indicate business activity and potential payment issues.

Pay for a business credit report. While the information isn’t always accurate, a business credit report confirms information the prospective customer provides. Verify that the numbers align and the new client’s credit application is accurate.

Keep in mind that none of the above guarantees the customer will pay you on time. If you want to err on the side of caution, accept small orders first to see how quickly the customer pays before accepting larger, and therefore riskier, orders.

Additionally, determine how much risk you’re willing to accept and establish suitable terms. You may require payment upon receipt of goods or services, at least initially, until you feel comfortable with the customer’s creditworthiness. Over time, as trust is built, consider relaxing payment terms to retain clients or customers.

Let the customer know – politely – that you want to ease into the business relationship; at least where extending credit is concerned. Most business owners work hard to earn your trust by paying on time. If they don’t, you probably can’t afford to have them as customers in the first place.

Conducting a credit check before extending credit is routine and shouldn’t be viewed as a lack of trust. Additionally, a single missed payment does not necessarily indicate an unreliable new customer. As a small business owner, you know there are times when cash is tight. The same is true for that new B2B client who wants your manufacturing business to produce widgets for them. Cash flow is rarely even over periods of time.

Take the time to check out all new prospects, whether you contact them through the sales department or they call you to ask about special pricing and terms. Taking on a new client involves some risk, but you can mitigate that risk by conducting a thorough background check of the new company.

In good times or bad, you’ll be glad to know your new client is reliable and credit-worthy. Oh, and your business is growing smartly – just the way it should.