Have you ever had a client you’ve invoiced, and they’ve suddenly gone a little too quiet? Perhaps they have started with some excuses from I need to take my pet to the vet, or my dog ate my invoice (the first excuse is a real example!) This is when you might be thinking ‘I should’ve done a credit check before onboarding them.’
So, what exactly is a credit check?
A credit check assesses any potential client’s payment habits, credit history, loan repayments, and how they are managing any credit they have now. Once this is evaluated, a credit score is calculated and allocated to them. Good financial habits can increase your credit score, while bad credit habits can cause your score to plummet, causing issues when trying to take out a loan or borrow credit.
Many B2B businesses use credit terms to improve their customer loyalty and increase sales. Lenders can use the information gained from a credit check to decide how many days their credit terms will be, or perhaps more importantly, whether they will extend credit to a client or not.
A credit check can be done by any service provider to see if a client could be a potential credit risk. It gives lenders an idea of how likely a client will pay, something which can have a major impact on a business’ cash flow.
Qualified creditors can get a company credit report from a credit bureau. This profile is essentially the business’ financial profile from annual sales to debt recovery activities and of course credit scores.
A credit check will often include:
Who the company directors are
The address of the registered office
A brief analysis of the company’s financial status
Whether there are any court judgements against the company
Details of charges over the company’s assets by third parties
Onboarding a client can often be a long process. However, it’s important not to forget credit checks in this process, especially if you will be lending out credit to them. It is an important stage in the credit control procedure and can save you a lot of time later down the line.
Clients with good credit scores should in essence be prompt payers of invoices. However, the score shouldn’t factor into your credit control process too much. If a client has a high credit score but misses out on a payment, your procedure for chasing payments should still be put in motion. Anyone, no matter their credit score can decide not to pay one day.
It’s also important to remember that a credit check only provides you with a snap shot of information there and then. A financial issue could occur after you have done the credit check and you may not know about it. Similarly, a company that is showing a slightly lower score than expected could be working towards their finances. Despite a low score, some people may take the gamble and work with a client that doesn’t meet the credit risk requirements.
Some of the reasons these businesses might do this include:
The company is expanding which is having a knock-on effect on profit.
The industry they are in is growing and forecasted to succeed
They might be an interesting business/business owner and someone you want to work with, especially if it’s a field you haven’t worked in before.
Ultimately, a credit check can give a little insight into what you may be heading into with a potential client, or even see how current clients are doing. However, it shouldn’t be the sole reason why you go forward with a business relationship with a client or not. You should always find out as much about your client as possible before agreeing to sign a contract and create a working relationship.
If you have started to hear all sorts of excuses from clients about paying up their invoices and need a bit of help, drop us a call on +44 (0) 1209 823118.