How to check the credit worthiness of your customers

How to check the credit worthiness of your customers
It is vital that you check the credit worthiness of a business asking you to extend credit terms: Can they afford to pay your invoice, and what’s their track record paying other suppliers?

Trading on credit terms is a long accepted business practice, but so is late payment and non-payment. To protect your cash flow you need to trade with customers who will pay you on time; waiting (sometimes in vain) to get paid impacts your own finances, and your overall business operations could suffer. When a cash flow gap develops and isn’t resolved, it can have a major financial impact on a small business, even leading to failure.

With that in mind, it makes a lot of sense to perform credit checks on each new customer to satisfy yourself that they have the finances to pay you on time.

How to assess the credit risk of a new customer

Having agreed that it’s important to know who you are trading with in order to reduce the risk of a bad debt, where do you start?

One way you can gain an idea of your buyer’s financial status is to log on to the Companies House website to find out basic information about them for free. In addition to confirming that the company name and registration number matches, you can also see:

  • The date the company was registered (a well-established company should be more reliable than one that started up six months ago)
  • Whether they met the deadline for filing their statutory information (demonstrating a good grasp of paperwork)
    If there are current insolvency proceedings against them (a massive red flag).
  • In addition you can buy credit reports as part of your onboarding process. These are an excellent way to identify adverse credit history helping you to make an informed decision when considering trading with a new customer.

A credit report can recommend credit limits, highlight payment trend history and adverse information such as County Court Judgments (CCJ’s) and can give an up-to-date indication of how long it is likely to take to receive payment from your customer. Information is available on all UK limited companies, directors and non-Limited companies. Costs are not high with most credit reference agencies offering unlimited access deals at a fixed cost.

How to credit check an existing customer

There is a tendency for existing customers to be treated differently than new ones. Of course you know more about an existing customer, including first-hand knowledge of their payment habits. However, circumstances can change and when they do you want to learn about them as quickly as possible.

You are best advised to include monitoring when accessing your credit report to open a new account. Business monitoring provides real-time business updates and risk alerts to notify you of changes in your customers’ business activities and financial status, so you can react quickly and make the safest business decisions. This will help you:

  • Improve your account management by monitoring your entire portfolio in one place
  • Explore new opportunities by reacting quickly when credit scores change for the better
  • Ensure you are constantly aware of your customers’ business activities and status
General advice for checking your customer’s financial risk

Other measures you can take in these situations, regardless of whether the customer is new or existing:

  • Ask their suppliers for references
  • Ask the customer for a bank reference
  • Visit them in-house to get a first-hand idea of how they’re being run