Protect Your Business with Credit Checks

Extending credit is a must for B2B businesses; but if you don't get paid it can cripple your cash flow. Here are best practices to follow to reduce the likelihood of payment delays or not getting paid at all.

The joy of taking on a new customer for your business can quickly turn sour if that customer doesn’t pay when they’re supposed to or, worse yet, if they walk away from making payment entirely! Providing products or services and not being paid is both a hit to your expenses due to costs incurred and a gap in your revenue, making it a cash flow double-whammy.

In the business-to-business world credit checks are a standard practice that allows the invoicing party to decide how much credit (if any at all) to provide before adding taking on a new client. Performing adequate due-diligence on customer credit before extending payment terms is a smart way to protect your business by setting the right payment expectations up-front.

The credit application is an important start to this process. By collecting the right kind of information on a potential client it’s possible to make smart decisions that help reduce the likelihood of payment delays or not getting paid at all. When obtaining and processing credit applications make sure to:

  1. Obtain customer consent - in writing. This is usually the only way references such as vendors and financial institutions will disclose client payment history and financial information.
  2. Collect multiple vendor references - three is a good minimum. Businesses that are already transacting with your client are a great source of information on past payment behavior, particularly if their commercial relationships are well established.
  3. Get contact information for individuals at their bank, not generic phone numbers. Reaching the right person at the customer bank can save you time and get you relevant information on your client, such as balances and history. For thorough diligence it can make sense to request information on previous banking relationships, giving you information about long-term behavior in addition to current financial wherewithal.
  4. Use the telephone when contacting customer vendors. Sometimes a phone call to the accounts receivable department can reveal great information on payment history. This is when written permission to contact references comes in handy, as some vendors will require a copy of this document before discussing payment history. Any mention of late payments by other vendors can be a potential red flag.
  5. Dial their bank and ask for specifics. Bankers are a great source of information on potential customers, and can usually provide insight into customer balances (current and historical) as well as how long the customer has been working with the bank. As with vendors, you may be required to share a copy of the written authorization document to obtain this information, but this extra step is well worth it to determine if a customer has a history of volatile account balances, as this may not bode well for payment consistency.
  6. Obtain a comprehensive business credit report. Reviewing the credit report of potential customers is a great way for businesses to verify basic information furnished during the application process. While business credit reports may vary in terms of accuracy they can provide confirmation of other information gathered during reference checks.

For customers who seem a bit riskier than you’d prefer or who don’t have much verifiable history it might make sense to extend credit on a trial or provisional basis, with lower quantities or dollar amounts involved. At the same time, it usually isn’t a good idea to be overly restrictive on customers who have an overall positive history but one or two hiccups. It’s a rare business that has a perfectly unblemished record over time.

The same can be true for terms; sometimes it’s probably a good idea to start with fairly conservative terms and then, as a customer proves their ability and willingness to pay on time, extend less restrictive payment terms. For others it might make sense to offer your best terms early on.

In all instances, it is a best practice to communicate clearly what payment arrangements you are offering and what, if anything, can be done to improve them over time. The best customers will understand well-reasoned credit procedures and will try to establish a positive long-term relationship by making timely payments. On the other end of the spectrum are customers who do not value this process or aren’t willing to make reliable payments, and it probably goes without saying that these may not be the right kind of customers for your business.

Businesses that conduct appropriate diligence on potential customers tend to prosper when things are going well or when business is more of a struggle. While no credit application or reference process is proven to result in 100% of customers paying on time and as invoiced, it’s still worth taking these extra steps to protect your business - and your cash flow.