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Are your new prospects creditworthy? The importance of customer credit checks

Winning a new client may sound like good news, but only if you can be confident that your new customer is going to pay their bills – so credit checks are an essential task to carry out.

Carrying out client credit checks on all prospects and potential new customers isn’t just good practice – it’s actually a fundamental part of making sure your business has money in the bank, a positive cashflow position and the liquid cash that’s needed to continue trading.

So, how do you go about checking your new customer’s credit rating?

Do your own credit research

Carrying out the necessary customer due diligence when taking on a new customer is incredibly important. And checking the financial health of the company is a key consideration.

By carrying out the right checks around credit and financial status, you can quickly get a feel for whether a company is creditworthy (and therefore a good prospect) or in financial trouble (and therefore a company you want to avoid doing business with).

Some key ways to do your own research include:

  • Reading the financial press – to look for stories relating to your prospect. Have they had any profit warnings? Is there any M&A activity? Any key changes in their C-suite?
  • Check online credit sites – with sites such as Dun & Bradstreet allowing you to find the prospects D-U-N-S number and check on their public credit information.
  • Look up their Companies House listing – and check on their financial history. Are their accounts late being filed? This can be a sign of potential money problems. Are there any other red flags you should know about?

Commission a credit check report

Commissioning a professional credit check report helps you to dig a little deeper into your prospects financial history – and can help to reveal any accounting skeletons in their cupboard.

Providers such as Graydon offer full credit check services that will give you all the financial, commercial and transaction-based company information you need about your potential new customer. This will include historical credit rating and payment data, as well as a monthly credit guide and risk category.

Armed with this data, you’re in a more informed position to decide:

  • Whether to take this company on as a customer
  • If you do, what level of credit to offer them (if any)
  • And the overall risk in working with this particular organisation.

Talk to other clients in the industry

Late payment can be a huge problem for many businesses, and that means word of slow payment and missed invoice dates tends to travel fast around a particular niche or industry.

Talk to existing clients in your prospects sector/niche and see what the ‘word on the street’ is. If you have relationships with any businesses that are already suppliers for the prospect company, have a coffee and a chat and see what they’re like to work with.

Having the numbers is helpful, but first-hand experience of the prospect is invaluable.

Monitor their payment performance

The Prompt Payment Code is an initiative that businesses can voluntarily sign up to, with the aim of providing clear guidelines and targets for the payment of suppliers.

By signing up to the code, businesses agree to pay suppliers on time:

  • Within the terms agreed at the outset of the contract
  • Without attempting to change payment terms retrospectively
  • Without changing practice on length of payment for smaller companies on unreasonable grounds.

If your prospect is signed up to the PPC, that can give you some clear comfort around their creditworthiness – and to their general attitude around prompt payment to suppliers.

For larger corporate clients, the ‘duty to report’ legislation around payment practices and performance makes public reporting of payment times a mandatory requirement. That makes it easier for you, as a supplier, to see how fast (or slow) corporate prospects are when paying.

You can check the available data re payment times on the government site here.

Track how well they’re paying you

With the due diligence, credit checks and background research done, you may come to the decision to take this prospect on as a brand new client – but the credit checks don’t stop there.

Once the relationship begins, it’s good practice to:

  • Monitor your client’s payment performance over time – to check their average payment times and see if there are issues or trends that need further action.
  • Measure their overall debt level – so you can decide how to prioritise the chasing of invoices, and when to take action around any high levels of bad debt.
  • Regularly review any credit arrangements – so you assess and update the amount of credit you offer to the customer, based on their payment performance and debt levels.

Using a smart cashflow and debtor tracking solution, like Fluidly, you can easily record and track all the payment data you need, and automatically pull this into reports and client dashboards. With the data at your fingertips, you have all the information needed to check which customers are the good payers, and which ones are lagging behind when it comes to settling their bills.

Work with the right customers. Keep your debt low.

There are a myriad of considerations to take into account when scoping out potential new customers, but checking on their overall creditworthiness really is a crucial check to get right.

Do your research, source the financial information you need and choose to work with the right customers – and you’ll see the long-term positive impact on your cashflow and debt level.

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