How a comprehensive credit checking process will save you money
It may seem obvious to consider the financial position of a new client or customer before deciding what payment terms to offer them. So why is it that so many companies fail to do it?
Well part of the answer is that a business may have always done things a certain way…which is never really a good reason not to continue doing something if it’s not working. The other reason is usually cost; credit checking a business or an individual is not free and usually means agreeing to an annual service with the likes of Experian or CreditSafe. What is often overlooked is that this upfront cost can actually help businesses save thousands of pounds in late or unpaid invoices later on down the line.
Another point is that whilst credit checking an individual is fairly common, credit checking an actual business is something that is done much less. Many business owners are not even aware that it’s something they can do. Every company has publicly available information about itself concerning its directors, its accounts, time of trading and in some instances how long it takes them to pay their own suppliers. The benefit of having this information at your disposal when on-boarding a new client is clear and as a result you can decide what kind of payment terms you are going to offer them.
Making Credit checking part of your client on-boarding process has the potential to save your business thousands of pounds.
Once you have credit checked your customer you can than choose payment terms that reflect their financial position. These can range from standard terms which would be around 30 days from receipt of invoice to anything up to 90 days…or indeed reduced to as little as 10 days if they are a higher risk. For the riskiest customers you can request PIA (payment in advance) or even consider setting them up on a CIA (Cash in Advance) basis. Something else to consider is offering a small discount to your customers for paying early, a standard example would be ‘1% 10 Net 30’ (1% discount if payment received within ten days otherwise payment 30 days after invoice date).
If you are going to offer a credit account to your customer, most credit reports will recommend the limit to which you should go up to…both on a monthly and an overall basis. Utilise this information to ensure that your customer never go beyond these limits. With one of the biggest concerns for SME business owners being cash-flow and late payers one of the most obvious ways cash-flow can negatively be impacted, surely credit checking is a no brainer?
It’s all about reducing your exposure to risk and you can only make the right decision if you have solid information to work with. Put aside any of those notions of having a good feeling about someone or trust…neither will help you when you’re struggling to chase overdue payments from a company that is on the verge of going under.
Put simply: Credit checking new customers means you will reduce the risk of late or no payment for your services, improve your cash flow and be a healthier company as a result.