Is your customer a credit risk? Check these documents to find out

08 September 2015 Kieron Johnson

Taking on a new customer can mean exciting times ahead but, before you take the plunge, you should assess the credit risk to your business. Are they a good bet? Read our guide on which credit documents you should get hold of, so you won’t have to hedge your bets in the credit stakes.

Banks and lenders don’t have a monopoly on credit checking. Unless your company is being paid upfront, you’re providing your customers with a credit facility. By not consulting those all-important credit documents, you’ll likely miss out on vital information that may affect your customers’ ability to repay you.

To do business on credit terms, you need to make the right call when it comes to assessing the risk involved. It can make the difference between running a flourishing business and a failed one.

We’ll help to guide you through the maze of credit verification documents at your disposal, so you don’t get involved in any risky business (unless you want to).

Is your customer creditworthy?

Your mission, should you choose to accept it, is to find the answer to this question: is your new customer worthy of your credit?

The good news is this message won’t self-destruct in five seconds, so you’ve got plenty of time to make this mission possible.

Credit checking is about calculating how much risk you’re prepared to expose your business to if you were to accept a new customer.

Trade credit checking is a tad bit more involved than consumer credit checking. You’ll need to paint a picture of the customer’s finances by looking at lots of information from a whole bunch of third-party sources.

Here’s the four most common credit documents you’ll need to get your head around.

1.Bank reference

Banks can pretty much be relied upon to give an impartial view of a customer’s financial affairs. That said, banks speak their own language, so it can be a struggle to make head or tail of what they’re saying.

Here’s some banking lingo you’ll need to become familiar with:

  • ‘Undoubted’ – this customer is rock-solid. There are no worries at all about their creditworthiness.
  • ‘Respectably constituted’ or ‘good for your figures’ – this customer represents a good risk.
  • ‘We don’t think they would enter into…” – exercise caution and weigh-up this reference relative to other info you compile.
  • ‘Capital fully employed’ – this customer is already immersed in heavy financial commitments.
  • ‘We regret we’re unable to speak for your figures’ – the bank has serious reservations about this customer’s financial situation. Translation: don’t touch this customer with a bargepole.

When you ask for a bank reference, you need to be specific about what you’re requesting, so be sure to define the sort of credit terms you have in mind. For instance:

“Is company X good for trade credit set at the level of £2,000 monthly on 30-day terms?”

2.Trade reference

Trade references can be a little unreliable in that it’s highly improbable that a customer would furnish you with trade reference details of someone who will give them a poor reference. However, it’s worthwhile pursuing this info just in case.

A couple of points to note on trade references. Firstly, if the referee’s name doesn’t ring a bell, run a quick search to see if it’s from a real company. Secondly, try to make your trade reference form as straightforward as can be, with brief answers and/or tick boxes. You may want to consider including questions along these lines:

  • How long has company X been known to you?
  • How much credit do you normally issue to company X?
  • What are the credit terms applied to company X (weekly, fortnightly, monthly, etc)?
  • Are company X’s credit repayments made according to the agreed terms?
  • Do you have any further comments you would like to make about company X?

3.Credit report

We’ve covered this fairly comprehensively in a previous article on business credit scores but, suffice to say, that a credit report is the pièce de résistance of consumer and commercial credit checking.

You can always get a company credit report from Yours Truly.

4.Company accounts

If you need more info (or the info you’ve gathered is either contradictory or inconclusive), it’s well worth asking to take a peek at your potential customer’s balance sheet.

Outside of these four documents, there’s another source of info that may be of use: Competitor information.

Some business sectors have long-running credit groups that share info. Find out if one exists in your area of business and, if so, get sharing!

It’s also a good idea to network with your business peers. After all, you may actually have customers in common. Whether your potential customer is a tantalising option or a company in trouble, you’ll be in-the-know.

In all cases, ask yourself if running credit checks is absolutely necessary. Whilst a one-off sale of £300 is unlikely to warrant a credit check, a request for monthly credit of £1,000 may justify one.

Credit checks aside, creditworthiness – like beauty – is in the eye of the beholder.