How to Conduct Credit Check on new Customers!!

Are you in control of who you give credit terms to? Read this quick guide to help you combat late payments from customers. Whatever your payment terms are if it is not received in time your cash flow can suffer greatly and slow you down in business.

As receiving payments on time is very important for business success, how you can ensure your debtors are good for their payments and see below the best methods for keeping them on top of your best payable customer list.

There are a number of ways to test how likely a customer is to pay their invoices on time. Most methods require a little time, but, depending on the importance of the potential customer, could help to ensure your cash flow runs smoothly.

The Problem with Not Doing Credit Checks

Credit fraud costs businesses billions of dollars every year. Small businesses can be particularly vulnerable - a sale of an expensive piece of equipment or weeks or months of services provided to a customer who is then unable to pay can be financially devastating to a small business owner. Contractors and small businesses are often unaware that their clients are in financial difficulty until they find out that the client has gone bankrupt.

Many small business owners operate on faith, as it were, doing a credit check by asking the customer for references. This is a fine system in an ideal world where everyone is honest. If we lived there, we wouldn't have to run credit checks in the first place.

21 Different Ways to Conduct Credit Checks!

1. Bank References Check

Check with their Customer Banks. Asking your potential customer for a bank reference can also give you a basic opinion on how risky the bank thinks your potential customer is.

2. Check with External Auditors

Check with their External Auditors. Find common people who can connect to the Auditors who have dealt with them in the past/current

3. Character

Research the people behind the organization you are dealing with. It’s important to assess a person’s willingness to pay, based on their overall attitude, their company values and the financial track record of the business and its leaders. Check for any signs of a dark financial past. Factors such as past defaults or court actions can give important insight into the financial and ethical standards behind the people running the business.

4. Capacity

Assessing the prospective organization’s capacity to generate sufficient cash flow to cover any outstanding debts should be the highest priority of any credit manager. This is critical before investing in a company or extending a large amount of credit.

5. Supplier references

Check with the common suppliers who is also supplying to them. Also call and check their top suppliers about their credit history with the customer. You can ask them how safe to deal with this customer

6. Economic Conditions

The current economic conditions in each marketplace may affect the ability of a business to repay debt on time, which may require adjustment of your credit policies.

Consider factors such as the impact of international economic conditions on the domestic market, such as offshore financial volatility and fluctuating exchange rates, Pandemic Diseases, as well any changes in the political landscape. Is the prospective customer susceptible to economic downturns?

7. Check with Customers

Check with common Customers of yours and them. Also check with your network who can connect with the potential customer for credit check.

8. Check with the Company Internal Sources

Check with their employees/Accounts/Sales Representatives/Purchase assistants. Find common people or your employees who has connections with these people. Call them and ask information.

9. Credit checking agency

Check with Credit Bureaus and credit check agencies

10. Capital

Understand your customer’s capital base, including their cash and other assets, as well as shareholder commitments. This is important to ensure credit has not been extended to an organization that can’t afford to repay their debt.

11. Google Search

Google Search and see what you hear about them. Check their Google and Facebook Reviews

12. Company website

Check their Website. Some times their company web site and latest news reveal how they are doing generally in business

13. Social Media Check

Check all of their Social Media Accounts– LinkedIn/Facebook/Twitter. This will also reveal how active they are in business and the progress.

14. ‘Pro-forma' approach

Using a pro-forma approach can help build trust between you and the customer. By asking for immediate payment of the invoice for the first few transactions, you can gain evidence that will support whether the customer is strong enough to pay once given credit.

16. Check Published Accounts

If your customer has published their accounts, take a look! By applying some simple accountancy formula to the information given from the sites, you can judge how likely the customer is to pay on time if given credit.

17. Cash flow

This is the “lifeblood” of any business. Poor credit control will greatly affect cash flow and the ability to pay debts on time, so it pays to develop an understanding of the financial situation of the business to which you are extending credit.

This will give you an indication of how swiftly they may pay you for your products or services and the likely impact on your company finances.

18. Don’t Deny the Obvious

As part of the customer credit check, ask relevant questions such as

i) How long has this company been in business?

ii) What clients have they worked with?

iii) Who are their customers?

iv) How has their relationships been handled in the past, etc.

v) To get a better sense of the company’s past history. It’s a good sign if they have been in business for a very long time and appear to be pretty stable.

vi) Company information including number of employees, sales, ownership and subsidiaries

19. Form a Network in your target Industry

You can also have a credit check done within your network of people who has dealt with this customer. If you are part of any network like BNI, it becomes easy.

20. What are the Active Checks you can do it? Contact the customers directly by one of the following methods to do credit check

i) A Phone call to their office with limited Questions

ii) Talk to the Finance Director/Owner and ask specific questions

iii) Ask for references

21. Check with ISO Consultants/Business Consultants

Check with the business consultants who are in touch with that business currently. You can even make a phone call to the company to find this information. Find common people who can connect to the ISO Consultants/Business consultants who have dealt with them in the past/current.

How do you avoid losing money due to Bad Debtors?

1. Supply your goods against cash as far as possible

2. Send Credit Application Form get signature from signing authority

3. Request Trade License Copy of a company

4. Request Passport copy or any other Identity card copy of the owner

5. Set Credit Limit and do not go beyond the credit limit. Do not give Credit to one customer more than the 10-15% of your turnover.

6. Start off with a low credit limit and short invoicing terms. As the client shows a regular pattern of paying invoices on time you can increase and extend your credit terms

7. Request Letter of Credit

8. Request postdated cheques

9. Request bank Guarantees

10. Be wary of customers who undertake aggressive sales and price cutting strategies as they may not be able to pay their bills if they are offering their products too cheap

11. Always stay up to date with industry and economic trends. If the economy is slowing down you may want to be a little stricter on your credit terms

12. Credit Insurance: One of the best ways to protect your company from overdue accounts and bad debts is to take out credit insurance. Credit insurance covers you for any outstanding money owed to you by trade customers. If your customers do not pay, your policy will reimburse you in full.

13. Have consequences conveyed to your customer in case if they don’t pay on time.

i) Like additional interests

ii) No further supply until clearing payments

iii) No Support services until clearing payments

iv) Legal action against them in case of non-payment

v) Prepare warning sequences for collecting payments

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