How To Check the Business Credit of a Client

Most companies that sell products or services to commercial (or government) customers have to offer payment terms – the option to pay invoices in net 30 to net 60 days. Many customers will only do business with you if you are willing to offer these terms. The problem is that not every company is creditworthy and deserving of terms. Some companies may pay your invoices late – 30, 60, or even 90 days past due. Others may be happy to take your product/service and never pay for it at all.

How to determine creditworthiness

How do you determine which customers deserve credit – and which don’t? What’s worse, offering terms can often create cash flow problems for companies without sufficient reserves. This issue gets more complicated if you sell to clients that either pay late or don’t pay at all. Needless to say, it’s an important subject.

First, a disclaimer. There is no method to guarantee that 100% of your customers will pay on time, or at all. However, by following some simple steps, you can minimize the chances of working with bad customers.

Step #1: Have every customer fill out a credit application. It does not need to be a lengthy form, but it should include their business name, address, contact information, and a list of three to five credit references. A “credit reference” is a company that has recently offered terms to them.

Step #2: Call their references and ask about the payment habits of your prospective customer. Additionally, get a commercial credit report on your customer. A number of companies, such as Dun and Bradsteet, Experian, and Cortera, sell commercial credit reports, offering reports with different levels of information at different prices.

Step #3: Evaluate the information from your calls to your prospect’s suppliers and from the credit report(s). Many credit reports include a recommended credit line as a reference to help you determine if you should offer credit and how much credit you should offer. As a rule of thumb, the amount of trade credit you offer should be close to the average of their credit lines. If you are making a large, important sale you may want to buy reports from more than one company to help ensure you have a more complete financial picture of your prospective client.

Can’t afford to offer payment terms? Try financing invoices

One last point. What do you do if you want to offer terms but can’t because you can’t afford to wait 30 days to get paid? One alternative to consider is factoring financing.

This solution can help you in two ways. First, factoring companies can finance your open invoices from creditworthy customers, alleviating cash flow problems. Second, factoring companies can help evaluate the creditworthiness of your customers – and their invoices – enabling you to outsource part of the credit function to a company that specializes in reviewing customer credit.

Need factoring financing?

Are you looking for a factoring quote? We can provide high advances at low rates. For information, please call (877) 300 3258.

Disclaimer: This article is intended for informational purposes only and not as advice. Please seek advice from professionals if you require it.