In an ideal world, a business would get paid as soon as it delivered goods and services to a customer. But this is the real world where credit is king, and you have to extend credit to the majority of your customers – especially when dealing with bulk transactions. Although offering credit to customers will help you sell products, it does put you at risk of delayed payments, or even worse, losing money.
Selling on credit to customers is just like lending money to them. Whether you offer 30, 60, or 90-day credit, you need some assurance that you will get back what is owed to you. But how can you tell whether a customer will honour their part of the agreement and pay up when the debt is due? The answer, business credit checks.
By conducting business credit checks on new as well as existing customers, you’ll be able to get a pretty good idea of how the customer has been handling their debts. When you conduct a credit check on a customer, the report you’ll get will contain important financial data about the client/customer including their debt payment history, liens, bankruptcy records, lawsuits and court judgements. The report will also include a credit score that’s an aggregate of all the variables.
Benefits of Conducting Credit Checks on Customers
CreditWorks suggests that running credit checks on customers before offering them credit facilities will benefit your business in the following ways:
- Maintaining positive cash flow.Having a positive cash flow is crucial to any business as it is what enables you to finance the day-to-day operations. By conducting a credit check on a customer before you sell to them on credit terms, you can gauge quite accurately whether the customer will pay their debt when or before it’s due. This predictability is crucial for maintaining a positive cash flow as it enables you to plan your business expenditureso that you don’t run out of cash before more comes in. This way your business runs smoothly without cash shortages that could be crippling.
- Determining the creditworthiness of a customer.When you sell goods or services on credit, there is always the risk of not getting paid. Since you can’t avoid selling on credit, the next best thing would be to ensure that the risk of bad debts is kept to a minimum. By conducting credit checks on new and existing customers, you can – with a high level of accuracy – tell the financial health of a customer and determine whether they’re capable of clearing their debt when it’s due. A seemingly healthy business could be drowning in debt which would make them a risky debtor.
- Avoiding fraud.There is bound to be fraudsters trying to make a quick dollar wherever there’s an opportunity. By credit checking new customers before you begin transacting with them, you can verify their legitimacy and avoid being conned. It takes time to build business credit, and this makes it nearly impossible for fraudsters to fake.
- Identifying opportunities. It’s not all about looking for the negatives with credit checks; they can also be used to identify opportunities to grow sales. By credit checking customers, you can find out whether they have the capacity to take on more debt without running into trouble when repaying it. With this information, you can tailor incentives that encourage “low risk” customers to buy more products from you and thus increasing your sales.
- Starting point for long-term relationships. For customers that you’re contemplating building long term relationships with, it’s important to conduct a credit search to determine their long-term outlook. After all, you wouldn’t want to go into business with a company that will collapse in a few months’ time. With the information you gather, you can make more informed decisions when building relationships with customers and implement terms that will ensure your business’ survival is not threatened.
Selling goods or services on credit is like lending out money; if banks don’t do it blindly, why should you? Check your customers’ business credit to protect the future of your business.