Credit Checks: The Crucial First Step to Avoiding Bad Debt

No matter what industry you are in, the success of your business relies on timely and consistent payments from your clients. In a perfect world, this would not be a problem. You would provide a product or service and in return, customers would pay you right away. But things are not that simple in the real world, and more often than not, companies are left to deal with a growing pile of unpaid invoices.

This is why it is important for business owners to be more discerning about the clients they trade with, especially if they are planning to extend credit. The first step towards this goal is to conduct a thorough credit check.

Here are some of the many benefits you can get from this simple procedure:

1. Vet potential customers

A detailed credit check will provide you with in-depth knowledge about a prospective client’s past and current financial situation. You can find out when they incorporated their financial records, their level of credit risk, their previous payment history, and many more. You can answer questions like: Are they solvent? Have they ever been involved in legal disputes regarding unpaid invoices? Do they have a history of non-payment?

All this information will help you make a more informed decision about who you conduct business with. This way, you can successfully minimise your exposure to bad debt.

2. Properly assess your client’s ability to pay

Credit checks also show you the financial history of a company through the accounts they have filed, the history of their owners and directors, and the records of previously associated companies. Potential clients usually provide glowing reports about their financial stability, but it would be unwise to rely on these assurances.

A credit report from an independent assessor is the fastest and most reliable tool you can use to properly assess a client’s ability to pay you on time if you do decide to trade with them.

3. Keep an eye on your existing clients

Another great benefit of credit checks is that they allow you to monitor the credit activity if your existing customers and suppliers. You will be notified whenever something changes with the company’s financial status as well as their credit rating and limit.

You can then decide if those changes will affect your clients’ risk factor and if you need to adjust the credit you are offering them. This way, you will be able to act proactively towards protecting your business from bad debt, instead of just reacting when it’s too late.

4. Identify the real decision makers

Whenever you have a new client, it’s always important to make sure you know who the decision makers are in the company. You will be making important arrangements and negotiations with these people, so you need to confirm that they are who they say they are in their organisation.

Plus, you need to know about the professional history of these decision makers. Have they been associated with organizations before that have become insolvent? Do they have other professional associations that might present a conflict of interest?

Thorough credit checks can help you with all of this. The best credit reports provide a lot of useful information about a company’s decision-makers to support or disprove any claims they may have made. This knowledge will guide you in making the best choice for your business.

Remember….

Credit checks are your company’s first line of defence against late payments and bad debt, so make sure you do not skip this step whenever enter into business with a new client. For more useful tips on how to get paid on time, check out this post.