In a perfect world, businesses would provide a product or service and get full payment immediately. Unfortunately, things aren’t so straightforward in the real world. Most of the time, you’d need to extend credit to your customers or risk losing a huge chunk of business. However, if you fail to manage your credit line properly, you also run the risk of suffering great financial loss.
So how do you successfully deal with the double-edged sword that is credit? Two words: credit checks.
Conducting a credit check on new customers is one of the most effective ways to safeguard your cash flow and the future of your business. Here’s how:
- Allows you to assess potential customers
A thorough credit report will provide you with important information about your customer’s financial resources, level of credit risk, liens, payment history, and current court actions. If you’re dealing with another company or entity, a credit report will also give you details on the organization’s ownership and tangible assets.All this information will help you evaluate whether it is worthwhile to conduct business with that client and extend them credit. Moreover, these details will allow you to create a payment scheme that will be ideal for both you and your customers.
- Helps you avoid payment defaults
Performing a credit check is also a great way to find out if a customer has a history of payment default. If they do, it would be advisable to seek full payment upfront from the proposed client. However, if they are unable to do this—which is usually the case—the most efficient alternative is to have them sign your terms and conditions. This way, you have something to fall back on in case the customer does not pay a debt on time or is unable to pay for some reason.If a client is reluctant to take either of these options, it’s typically a sign that something is off and that you may have a hard time collecting payments from that client in the future. In this case, it might not be a good idea to extend credit.After all, if a company is not willing to place faith in themselves, why should you place your faith in them?
- Enables you to formulate an effective action plan
The information you get from performing credit checks help you create a more fool-proof plan of action when it comes to dealing with other businesses. For instance, if you find that a company has a bad credit history and has issues with making payments, it’s a good idea to obtain a personal guarantee from them.A personal guarantee would mean that if that company enters administration, you are at liberty to proceed with legal action against the Director personally. In many cases this will be enough to make sure the Director pays what they owe you immediately.Although this scenario might sound a little extreme, it’s actually quite common these days. A recent SBR investigation conducted on the Rogers Reidy Riskwatch report showed that an average of 22 companies per day collapse due to voluntary administration and winding up applications. This number is likely going to increase in times of financial uncertainty.By having a client with a bad credit history sign a personal guarantee, you are protecting not only yourself, but also your business. This will also ensure that you will not be out of pocket for debt recovery should SBR step in. After all, your business should not operate as a bank.
Conducting credit checks on your new and prospective clients is more than just about security. It’s about making sure your organization is safe from any unpleasant surprises. It’s a smart, proactive business move that can save you from a lot of trouble in the future.
And when the time comes for payment collection, allow us here at SBR to ensure that your debtor transfers your invoice from the bottom of the pile to the top. Be first to escalate, be first to get paid!
To find out more about how SBR can help you, contact Liam White for a free consultation at 02 9191 4518 or contact your personalised Accounts Manager to conduct any company credit checks.