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 several 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 of your customers
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 to pay
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 other 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. Sometimes their company web site and latest news reveal how they are doing generally in business
13. Social Media Check
Check all 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, 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 history. It’s a good sign if they have been in business for a very long time and appear to be 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 have 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.
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