Credit checking potential customers might require effort and expense on your part, but it can mean the difference between getting paid or not.
If you don't run credit checks, the worst-case scenario is you won't get paid, of course, but it could simply mean you'll always get paid late. The problem isn't just the money you lose, but the extra work you'll need to do to recover the loss.
Many businesses don't run credit checks frequently enough. Don't be flattered by someone placing a big order and take it on without doing some checks.
Credit checking enables you to gauge the financial reliability of potential customers. Serious problems in their financial history will be revealed. Many businesses outsource and use an agency to check potential customers who seek credit.
A basic report can be low cost. This will provide a basic analysis of a company's filed accounts. The agency will tell you about any financial problems the potential customer has had, or make a recommendation that they are a safe credit risk up to a certain amount of money.
What you yourself can do
You can take steps yourself to gauge the creditworthiness of potential customers. It is wise to make this standard policy for all new customers who request credit.
It is essential to get customers to fill in a credit application form, which should include their basic details. The crucial information is simple, such as getting their company name right. Ask for trade references too, and make sure you take them up, particularly if they are from organisations you know or that are well known.
With your potential customer's permission you can contact their bank for a reference (you will have to pay for this). If a business is new and therefore has no credit history, you could run a personal credit check on the owner. You must get their written agreement before you do this. It will go on their credit file and might affect their personal credit rating.
What to do if you have doubts
If you are concerned that a customer might not be (or isn't) creditworthy, there are still ways you can do business.
Find another way of doing the deal. Ask for a personal guarantee from a director, a cash payment up front, or a deposit. If you act professionally and talk honestly to your customers, most people will understand your concerns, even if they don't like them.
The safest option, of course, is to negotiate an upfront payment that will cover your costs, and then arrange payment in full on delivery of the goods.
You should never grant credit unless you are confident you will get paid. There are times when it is best to walk away.
If the customer is evasive when you ask for credit references, then that usually speaks volumes. Weigh up the risks: losing their custom will be less damaging in the long run than taking it on and not being paid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.