Knowing when to credit check customers can be one of the first hurdles to leap over towards more consistent cash flow and reduced risk. It can seem like a daunting question at first: different customers might place vastly different values of order, and big brand-name clients may impose their own payment terms on theirRead More
But even if your biggest
clients demand 180-day terms, rather than the 30 days you have agreed with everybody else, there’s no reason not to be consistent in terms of who you credit check.
Small firms typically place smaller orders, but have a higher risk of non-payment as they are less able to withstand shocks to their own cash flow.
They also most likely form the largest part of your customer base, simply because there are more small firms out there than big brands.
Medium-sized and growing businesses
Companies tend not to reach medium-sized status and then just stop; it is often an intermediate stage as they work on expansion to try and become a market-dominant force.
Any company whose structure and operations are in a state of flux represents a risk, compared with those that are either well established, or simply stick to what they do best.
Again, credit checking as a routine element in your approvals process helps to make sure that you are extending credit not based on reputation alone, but on a sound understanding of the company’s financials.
Although the threat of a big brand entering administration may be an isolated one, there are other complications that can arise from doing business with a vast, sprawling and potentially multinational organisation.
Unless their internal processes are in order, they might simply lose your invoice, or delay payment indefinitely – and it can be hard to fight against a commercial leviathan, especially if they are based abroad.
Credit checking can quickly and easily flag up any of these concerns before you have allowed the brand to run up a bill; it may still be tempting to take them on, but as we always say, any non-paying customer is not really a customer at all, but simply a liability.
Credit checking customers of any size gives you a head start on protecting your cash flow – again, if you don’t extend credit to a high-risk client, it’s not ‘lost earnings’, because there’s a good chance they would never have paid you anyway.
Instead, credit checks allow you to minimise individual and aggregate risk throughout your entire customer base, from the very start of each client’s relationship with you, which should have knock-on effects in terms of encouraging prompt payment further down the line.