Are they worthy?

Mar 12, 2018
Brian O'Connor
The Basics

If you are a company that offers credit to your customers, one of the most important things you need to do when taking on a new customer, is to check and verify their creditworthiness. After all you wouldn’t necessary lend someone money without making sure they could pay you back…..right?

There are a number of ways of making sure your new customer is creditworthy, these can include;

Credit application form  

This is a form the customer should fill as part of their request for credit from you. The form itself doesn’t need to be overly complicated, but you should use it as an opportunity to make sure you have all the correct details for the customer such as contact information, company name/number, tax details etc. It is also a great opportunity for you to make sure the customer is aware of your credit terms by requesting that they confirm they have read and agree to them.

Trade References

As part of your credit application form you should ask your new customer to provide you with a list of their current suppliers who would be willing to offer a reference on their payment performance.  You should select 2 or 3 randomly from this list, pick up the phone and talk to them. Try to get a sense of their payment history and how they might have handled any payment issues in the past.  Look for consistency across the referees.

Bank References

It can sometimes be worth asking the for a reference from the customers bank.  These can however be quite limited due to the restrictions on what information the bank can share, but it can still prove useful to get a sense of their relationship with their bank.

 

Published Accounts

You can also learn a lot from looking at your customers published accounts, particularly if you look at a the previous number of years(at least 3) so that you can see the evolution of their turnover, profitability, cashflow, assets and their liabilities.

Commercial credit checks

Rather than trying to understand your customers’ accounts you could opt to purchase a commercial credit check from any number of companies such as Experian, Transunion, Equifax, etc. The benefit of using an external company to run a credit check is very simple….they are the experts. They constantly run credit checks and analysis and have a wealth of knowledge available to them.  Their reports are detailed and in many cases may often suggest an appropriate level of credit to offer your new customers.  

Usually we would recommend using a combination of these methods to assess your customers creditworthiness. It is also important that this is an exercise that you regularly do with your customers, and not just when they are new.

Circumstances can always change and your customers ability to pay often does change…..so you should always make sure they are worthy.

 

photo credit: Charisse Kenion on Unsplash

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