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Why credit checks are worth doing

Why credit checks are worth doing

Credit checks are worth doing, simply because if you don’t know the financial strength of the company that you are doing business with, you risk losing control over this essential business function.

Good credit control is all about managing the money going in and out of your business.

It’s all about knowing how likely it is that your potential customer will pay you. By performing a simple credit check, you could avoid potential problem payers or at the very least be informed about their general credit-worthiness.

The cost of credit check is minimal, less then $100.00, so there is little reason not to perform one.

When should you do a credit check

It’s good practice to make credit inquiries for:

  • Any new customer
  • Any existing customers whose payment pattern has deteriorated
  • An existing customer where your credit exposure is very high (e.g.if as a result of non-payment you are left in financial difficulties)

The credit vetting process

In the credit vetting process, you cannot afford to rely solely on the apparent size of the organisation. It is normally the larger organisations that fail to pay or fail to pay you on time.

Once you have decided to extend a customer credit terms:

  • set them a credit limit
  • notify them of both the limit and the general terms of trade upon which you are prepared to do business
  • ensure that these terms are stated in your contract and on your invoices.

If your customers don’t pay

  • Follow a process for debt collection
  • Follow a timetable for debt collection
  • Withhold further credit from any customer who has exceeded his credit limit or whose account is significantly overdue.
  • Consider making an arrangement to supply them, say, $500 of extra work for every $1000 paid off the account.
  • Use your Shark Patrol membership to encourage payment

Credit checks are worth doing

Credit checking is not a “one-off” exercise, it should be continuously monitored and re-evaluated, taking account of both the customer’s payment history with your own business and by regularly updating the externally available information, such as that available from Insolvency Watch.

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