Key questions to start your credit assessment process

When deciding a potential customer's creditworthiness, there are some basic questions you can ask to help you get started with your credit assessment process. These questions are fundamental in trying to understand any business and can be used whether you are assessing a major company or new small business.

1. Are any of the people you're dealing with, or anyone involved with the management of the business bankrupt?

You can check if a person is an undischarged bankrupt with the Insolvency and Trustee Service Australia (ITSA). It's against the law for bankrupts to be involved in the management of companies.

2. Does the business keep adequate books and records?

You may not be able to inspect the records, but do any of your dealings suggest these records are poorly kept? Poor records are a definite danger sign.

3. Does the business have an accountant? If so, how long has that person been associated with the business?

An accountant isn't a guarantee of safety, but it means there's a better chance that the financial records are in order. Larger companies may have an external auditor as well.

4. Does the business have a good name with other suppliers, competitors, etc? Does the business pay its suppliers on time? Can it produce credible trade references?

It's a good idea to check these references by contacting them and asking some questions.

5. What is the credit rating of the business?

If you provide credit to someone for more than seven days (even if it's just a small amount), you may join Dun & Bradstreet. You can use our credit reference services to find out the credit rating of the business and if it has any credit defaults. This will tell you whether it's a good idea to extend credit to the business.

Learn how to obtain the credit rating of a potential customer -  visit the credit section of dnbsmallbusiness for more information on managing your credit policies >>

6. What is the quality of the goods or services?

You may know or you may be able to find out from previous customers. This is not a guarantee of good business practices, but poor quality may be a warning sign.

7. Do the business activities require a licence?

Many small businesses you will be dealing with need a licence to carry out their business, e.g. builders, plumbers, motor car traders.

Call the Fair Trading/Consumer Affairs department in your state. They can tell you which licences a business needs. Next call the relevant licensing bodies to check if the particular business holds a licence. Financial planners need a dealer's licence or proper authority from dealers licensed with ASIC.

8. Is the business a member of an industry association?

There are various industry associations that the business could belong to. Some of these have standards of conduct and ethics that their members must comply with. If the business belongs to one of these it's a good sign.

Call the Employers Federation/Chamber of Commerce or equivalent in your state. They can tell you which industry associations are relevant to the business you're interested in. Ask the business if they are a member of an association, and check this with the relevant association.

This article is an excerpt from D&B's Guide to Cash Flow and Credit Risk. Click here to find out how to obtain your copy >>

      D&B Guide to Cash Flow and Credit Risk.bmp


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