Provide credit with caution

When it comes to granting a customer credit, there are many factors to consider. Essentially, you want to know if they have a history of paying their creditors on time and whether or not they have the capacity to repay your account. To establish whether or not this is the case, most businesses utilise simple but effective credit checking processes, thus providing confidence that when the bill falls due their customer will have the money to pay the account.

The information below provides some important insights about performing credit checks on new clients and established customers:

Types of credit checks

There are a number of different reports available, allowing SMEs to check a range of factors, including financial statements, credit applications, trade references and bank references.  All of these factors contribute to a sound evaluation of a client's suitability for credit. However, a sure way of checking a businesses' credit worthiness is to purchase a D&B Report from Dun & Bradstreet. A D&B Report offers the most comprehensive view of a company's credit history, information that is invaluable to you especially when you are considering granting a significant sum on credit.

Included within a D&B Report is an independent view of a business's trade payment history (including payments within and beyond terms) and payment performances measured against industry averages. It also lists different amounts of credit afforded to a business by its suppliers, the total amount of credit afforded to a business by suppliers and percentage figures concerning how long on average it takes your business to pay this money back (e.g. <30 days, 31-36 days etc.).

Dealing with difficult credit applicants

While credit checks sometimes reveal a client's credit history to be in a state of rude health, it can also signal that their financial health is failing and the likelihood of being repaid is slim.  In the case of the latter it may be necessary to straight out decline the extension of credit and to insist that payment is made up front, or at the very least, a sizable deposit laid down.

Denying a potential customer credit (or an existing customer more credit) is never a pleasant task, especially if it leads to the customer complaining or protesting the decision you have made. If you have done your homework however, such arguments will offer little persuasion. Emotional pleas are no foil for the facts.

In such situations, it is also worth bearing in mind the classic quote by Queen Gertrude in Shakespeare's Hamlet, 'The lady doth protest too much, methinks.' In other words, someone who protests at great length or too loudly and emphatically about an adverse decision is most likely to be concealing something. In many ways this is an important observation to keep in mind when dealing with clients (or should that be merchants) who doth protest too long and too loud.

It is also worth remembering that you don't have to give a detailed explanation if you do decide to decline a customer's request for credit.

Don't get stung

The reality is that less than desirable customers often slip through the net as companies too anxious for new business do few, if any, background and credit checks on applicants. Other companies just set minimum credit limits and any application under that amount will not involve a credit check. However, be aware that some customers will aim to take advantage of such policies by only applying for small amounts of credit. There are a few lessons to be learnt here.

Obviously, when dealing with new clients you need to proceed cautiously by doing your research. However, even if you have a history with a client it is worth running occasional credit checks on them to assess their credit worthiness. Many established SMEs experience difficulty due to a variety of reasons (changing market landscape, stagnation, an un-sound new business model) and it is important to know if one of your longer serving clients is running into cash flow problems. If they are and you don't know, their problem might just become your problem. However, by performing occasional credit checks you are best situated to anticipate any changes in a client's ability to pay you on time. If you do have doubts over a debtor's liquidity, you can undertake proactive steps such as cutting back their line of credit or chasing overdue accounts more quickly.

Credit reports are confidential

If you obtain a credit report from a bureau such as Dun & Bradstreet bear in mind they are confidential. Under the terms of purchase or subscription, you are prohibited from providing copies of these reports to customers. Should a customer or applicant insist on obtaining a copy of their report, refer them to the credit reporting company. Additionally, you cannot reveal information given to you in confidence by trade creditors or banks.

The decision to grant trade credit to a client is one that should not be made lightly. Always do your research to find out whether the potential customer has a good credit history and what the recommended credit limit for their business is. If you sail blindly through this process its likely you'll be stung by a debtor that has no capacity to pay you back. In summary, to use another quote, 'to be forewarned is to be forearmed'. 

For more information on how to carry out a credit check see 'Credit checking is still essential'>>

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