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Credit Checks: It Is 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. That will have a negative impact on cash flow, which can hurt 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 you extend any form of credit to a new customer, take these steps to check the customer’s credit history to decide whether, how much and under what terms 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. Get contact information for vendors who have long-term business relationships with your new, potential customer.

Get contact information for banks with which the customer currently has accounts. Ask for contact information for specific individuals at those banks to insure you speak with someone familiar with the customer. To be more thorough, take it a step further and ask for previous banks’ references. Talking to those contacts provides a more complete picture of a new customer’s credit worthiness.

Call the customer’s vendors. Ask for accounts receivable and ask vendors to verify the customer’s payment history. If the vendor requires written authorization to release information, send a copy of the authorization signed by that 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 authorization signed by the customer. Look for comments about dramatic fluctuations in account balances which could be a sign of business activity and potential problems in getting paid on time.

Pay for a business credit report. While the information isn’t always accurate, a business credit report confirms information the prospective customer provides. Check to make sure the numbers sync up and the new client’s credit app is accurate.

Keep in mind none of the above guarantees the customer pays 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, ergo, riskier orders.

Also, decide how much risk you’re willing to accept and establish appropriate terms. You may require payment upon receipt of goods or services, at least at first, until you feel comfortable with the credit-worthiness of the customer. Over time, as trust is built, relax payment terms to keep clients or customers in place.

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. Also, a single missed payment doesn’t 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 make widgets its widgets. 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 does involve some risk, but you can lessen that risk by conducting a detailed 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.

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This article contains general information only. Sunflower Bank is not, by means of this article, rendering accounting, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, before making any decisions related to these matters, you should consult a qualified professional advisor.