Winning a new customer is usually good news. They might place a decent-sized order, agree to ongoing work or look like they could become a valuable client for years to come. Understandably, most business owners are thinking about the opportunity rather than whether they’ll eventually get paid.
But if you’re going to provide goods or services before receiving payment, you’re effectively giving that customer credit.
That’s where a business credit check can be useful.
A Little Homework at the Start
Credit checking doesn’t need to become a major exercise every time someone places an order.
It’s more about knowing when the risk justifies taking a closer look.
A new customer asking for 30 or 60 days to pay is an obvious example. The same goes for an unusually large order or an existing customer asking for a higher credit limit.
Before agreeing, it’s worth knowing a little more about the company you’re trusting with your money.
A credit report can highlight things such as previous County Court Judgments (CCJs), financial information, credit limits and other signs that a business may have struggled with its finances in the past.
It doesn’t necessarily mean you shouldn’t work with them. It just gives you more information before deciding how much credit you’re comfortable offering.
Existing Customers Can Change Too
It’s easy to think credit checks are only for new customers.
A company you’ve dealt with happily for five years can find itself in financial difficulty just as easily as one you’ve never worked with before.
Often, the first clue is a change in behaviour.
An invoice that would normally be settled on time arrives a week late. The next one takes longer. Perhaps part-payments start appearing or someone who always answered the phone suddenly becomes difficult to reach.
There could be a perfectly reasonable explanation. But it’s also a sensible point to check whether anything has changed.
Bigger Orders Mean Bigger Risks
One situation that can catch SMEs out is a customer suddenly placing a much larger order.
Turning it down might feel like madness. After all, growing sales is what most businesses are trying to do.
The trouble comes if you normally supply £2,000 worth of goods to a customer and suddenly agree to £20,000 on the same payment terms. Your exposure has changed considerably, even though the customer hasn’t.
Taking another look at their financial position before saying yes can help you decide whether the existing terms still make sense.
It’s Not Just About Customers
Suppliers are worth thinking about too.
If your business relies heavily on another company to supply stock, materials or an important service, their financial problems can quickly become yours.
A key supplier suddenly disappearing could leave orders unfinished and customers waiting. That’s particularly important where you’ve become dependent on one business to keep things moving.
Credit management isn’t only about who owes you money. It’s also about understanding where financial problems elsewhere could affect your own business.
Preventing a Chase Later
At Churchill Recovery Solutions, we’re normally involved further down the line, once an invoice hasn’t been paid and the usual reminders have stopped getting anywhere.
By that stage, circumstances can look very different from when the work was first agreed.
That’s why good credit management starts much earlier than debt recovery. Checking who you’re dealing with, setting sensible limits and paying attention when behaviour changes won’t prevent every bad debt.
It can, however, help you spot the ones that perhaps shouldn’t have been allowed to grow quite so large in the first place.
Sometimes ten minutes spent checking a customer at the beginning can save weeks spent chasing them at the other end.