Unless you’re lucky enough to do business with blue chip companies and public bodies, you’ll need to try to ensure that your customers will be able to pay your invoices. Here are the key things you need to know about checking credit ratings.
Imagine walking into a supermarket or store that you’ve never used before, and filling a trolley full of shopping. That’s not so unusual, but also imagine that you’re not asked to pay at this point, but simply required to promise you will pay and to provide proof of your address so that a bill can be sent later. You do this and walk out with your selection.
This sounds far-fetched but many smaller businesses who provide goods or services to other businesses, which are invoiced at a later date, do pretty much the same thing and then seem surprised when some customers don’t pay.
Providing goods or services in advance of payment gives you access to more potential customers, but it also exposes you to the risk of customers defaulting. To reduce this risk you need a system for credit checking customers.
Ask your new customers to complete a credit application form. This will give you the information you need to assess their credit risk, and will also show them that you take a serious approach to granting credit. The credit application form should include:
Generally speaking, the larger amount of credit a customer asks for, the more checks you need to do.
In the same way that credit reference agencies can check personal credit ratings, they can check out a business’s likely ability to pay back debt.
Credit reference agencies work with building societies, banks, mobile phone companies and other major retailers. When a person or business applies for credit they will use any data stored against this person's name and address to decide if he or she will be likely to pay it back. It is then down to the lender to decide whether to give credit or not.
Credit reference agencies investigate factors such as whether the customer pays their bills on time, whether they have any county court judgments against them, and what their financial results are.Find out more
Credit check results
Agencies will provide a credit score which shows their view on the customer’s credit risk. Agencies can deliver instant reports online as well as carrying out more detailed investigations.Find out more
Write to the potential customer’s bank and let them know what credit amount and payment terms you’re thinking of offering their client. Ask the bank if:
Bank references typically cost about £25. It can take some time to receive them.
If your customer is a limited company you can ask them for their latest accounts, or you can request them yourself from Companies House for just a few pounds. But be aware that the accounts may be over a year old.
If it’s practical to do so, why not visit the potential customer in person? This may give you a perspective of the customer that you might not get from credit checking agencies and banks.
Once you’ve done your research and considered the information you’ve received from credit agencies, trade referees, banks, etc, you need to make a decision about whether to give the customer credit, and if so, how much.
The upper credit limit you set for a customer should be the amount you’re willing to lose if things go wrong, e.g. the customer becomes bankrupt or insolvent.
If a customer says they want to purchase goods or services from you that would take them over the limit you’ve set, you can try to ask for payment up-front for the extra amount.
You may wish to make use of a system of 'risk codes' to help with your decision:
For more on reviewing credit limits read an article by Experian here.
The CSA is the UK trade association for the debt collection and debt purchase industry.Read more
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