Important: Do you credit check your potential customers?

approved credit checkFor any business it is important to have customers, however, what is more important is knowing they will pay for your services or products. Whilst it may seem ludicrous to turn business away, it is far better having quality customers who settle their invoices on time rather than customers who dodge payment days or constantly breaking promises that they will pay tomorrow – tomorrow may never come!

Prompt, regular payments and healthy cash flow go hand in hand. Having money regularly coming into the business account can ensure that business finances remain at a healthy level. Unfortunately, bad debtors could lead to uncertainty for a business and in worse case scenarios bankruptcy and the owners having to ‘shut-up-shop’.

Did you know that bad debt and cash flow issues are often the two main reasons as to why small businesses or startups fail?

Giving customers extra time to pay their invoices should be a thoroughly thought out decision made by key decision makers in the company. A decision such as this should be based on past dealings with a client and your relationship, it should never be a way of winning a new client.


Surely I don’t need to credit check everyone – even larger firms?

Myth – if it is a large company or they have been around for a while surely this is a good indication that they will be good to do business with.

cashIt is evident from recent news that even large companies who have been established for many years have as much chance as going under as SMEs or startups. Size/age is no guarantee that they have large amounts of cash. In fact, larger companies tend to delay settling invoices, as they believe their size gives them the power to do so.

So how do I go about credit checking customers?

Below are the steps and overall process involved with credit checking a customer:

#1: Get to know who you are dealing with – this may sound obvious however there has been so many cases where a debt collection agency will receive incorrect details when chasing payment on behalf of a client. For a credit check to be carried out on a customer the below information is required:

  • Trading name
  • Company number
  • Director names
  • Full address
  • Billing address (only if applicable).

#2:The actual credit check – a full credit check report will help you make the decision of how much credit (if any) you are going to give.

#3: Ask for references – make sure to follow up as a final precaution.

#4 Create terms and conditions – these need to be watertight for your business. You can’t solely rely on purchasing a standard set from the internet as these will not necessarily be suitable to your company’s needs.

#5 Take order numbers – make sure that you take these from larger companies.

#6 Proof of delivery – make sure that you obtain a proof of delivery if you supply goods.

Using a Credit Checking Agency vs Companies House

Option #1 – Using a Credit Checking Agency

This is often the most reliable option as you are leaving it to the experts who have many years’ experience in this field. They will know what to look out for and the best way to get the information that equips you to make the best decision when taking on board a new client. In some cases, you can request a full and comprehensive financial report on a business. This will enable them to give the business you want to deal with an overall credit score and suggest the best possible credit limit.

Option #2 – Companies house

As long as the company you want to do business with is a limited company, another option is to have a look through the records on Companies House – the UK company registrar. Companies House will be able to tell you whether a company actually exists along with their financial status. Companies House records do not go in to as much detail as a report from a credit checking agency e.g. you won’t receive a credit rating nor will you be given a recommended credit limit.

With option #1 and #3 you can also get information about the directors of the company which is very important! The company may have a solid financial background but this may not be the case for 1 or 2 of the directors.

What’s the difference between credit control and credit checks?

question markAs explained above a credit check is a one off occurrence whereas credit control is a system/process put in place by a business to make certain that credit is only given to customers who can pay and ensuring customers pay on time.

By improving the management of debtors this can help reduce bad debts that can harm the business and actually improve the cash flow levels. This, in turn, will help businesses avoid the need to pay interest on overdrafts and improve credit terms with suppliers – as the business will always have cash when they need it.

Can anyone do credit control?

Unfortunately not, no. Credit control requires a specialist mix of skills, along with time, resources and having the right systems and processes in place. It is not just a case of collecting cash from customers who do not pay; credit control involves building relationships with customers and creating a rapport. Urging customers to pay or constantly asking them to pay up can be a difficult conversation and if businesses are not careful, they could end up upsetting customers. Even those who they have developed a good relationship with over the years. A credit control expert will be able to handle these conversations professionally and efficiently, resulting in getting the money they owe to the business, whilst doing their best to not harm the relationship.

Don’t be the last in the queue

In the case that you have a debtor who owes money to many different companies, if you are not there reminding them to pay you and being at the front of their mind, your business will be last in the queue when the debtors starts to pay their overdue invoices off. This is a position that is far than desirable.

By having effective credit controls in place and always ensuring that you are credit checking customers, you can protect your business and ensure that it succeeds. Don’t let bad debtors or unhealthy cash flow be the end of your business.

Want to talk to the team about credit control for your business?

Get in touch with the CPA team

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