When and how to run a credit check on your client
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No one likes not getting paid for work done or products sold. Even just getting paid late has bad consequences for your cash flow – the life blood of business.
Trying to get the money owed to you can be painful and difficult, and perhaps even expensive. Wouldn’t you rather avoid this scenario altogether? A proven way to do so is by running credit checks on your clients and customers.
When should you run a credit check?
It’s simple. You should run a credit check on your clients and customers whenever you extend credit to them. You wouldn’t expect a bank to not run a credit check on you when you apply for a loan and it should be the same with your clientele.
Whether your clients have 30, 60 or even 90 days to pay you back, your cash flow can suffer significantly if your customers are late with their payments.
So how do you go about checking their credit-worthiness?
Credit checking agency – A credit checking agency will give you a full risk assessment for scenarios where you could stand to lose a lot if your clients don’t pay up. A professional credit checking agency is neither the simplest nor the cheapest option. However, if you need to credit check a potentially major client then this is probably a good idea.
Assess their attitude about costs – Have a frank discussion about costs right from the start. Lay out all the facts like cost projections and reasons behind the costs. Some negotiation is normal at this stage but if there is a lot of pushback and quibbling already then that could be cause for concern. On its own it might not be enough to deny credit, but it is a red flag.
Bank references – If anyone knows about credit it is the bank. Ask for a bank reference so you can get a basic idea of how risky the bank thinks your potential client is. This is a good place to start although it might not give you the final answer you need.
Pro-forma – Another option is to first build up trust between you and your client before extending credit, especially if you want to foster long-term relationships with your clients. This is the “pro-forma” approach where you begin by insisting on immediate payment, and only once the client has proven their ability to pay do you begin extending credit. This is a good idea if you are not entirely sure about their credit worthiness but want to still give them a chance.
Performing these credit checks won’t guarantee that you will never have issues getting paid, but it will help weed out the most likely trouble-makers. There are other measures you can take when clients aren’t paying you, but it is always best to not let it get to that by first doing a credit check.
This article was brought to you by Digicash, which provides a debit order system that helps you get paid what you’re owed – when it’s owed.