You have a new customer and they want to pay after you deliver your product or service. Essentially they are asking you to extend them credit. Like every bank that lends money, you should check your customer’s credit to make sure they have the financial capability to pay you when the time comes. There are 5 easy and inexpensive steps to investigating your customer’s creditworthiness.
- Collect Information and Get Permission
Before you can investigate your customer, you need to get some basic data, such as their business name, contact information, bank and trade references. Normally this is done on a credit application. Typically this is a one or two-page document that your customer fills out, signs, and returns. The credit application will include language to give you permission to check their credit.
If you don’t have a credit application, you can find samples on the Internet by searching for credit application templates or forms. The credit app can be used to set legal terms to protect you in the event your customer does not pay on time.
- Confirm Legal Name of Business
It is important to know the legal entity you are actually dealing with. This can be easily checked online for free. All states have Secretary of State websites where you can search for “business entity” or “business name” to confirm the exact legal name of corporations, LLCs (limited liability company), and partnerships. If the name you check doesn’t come up in the search, ask your customer if they have a different legal name or are registered in a different state, which you can then verify.
- Run A Business Credit Report
A typical business credit report will tell you if your customer has outstanding judgments or tax liens for unpaid bills. You should be concerned about getting paid if they aren’t paying others. You can get reports from Ansonia, Cortera, CreditNet, Dun & Bradstreet, Equifax, Experian, Kroll or Transunion. The cost can range from $8 to $188 for an individual report, or as low as 3 cents each with a subscription. Reports can include information on how your customer pays other vendors and a credit risk rating.
- Check Trade References
Contact the vendors that your customer named on the credit application. Ask how long they have done business together, the maximum amount of credit they have extended in the last year, and the average amount of time it takes for the customer to pay. You may also want to ask separately if they have been late on any invoices during the last 6 months.
- Check the Bank Reference
Banks won’t tell you much, but they usually confirm when the account was opened and the approximate average balance. You may want to specify that you are seeking the average balance during the last 6 or 12 months. The banks will ask to see where you got permission from your customer to release information.
Once you have a process in place, it should take 15 minutes or less to check a company’s credit. That’s a small investment to dramatically reduce the chances of not getting paid.
About the author: Dean Kaplan is President of The Kaplan Group, a commercial collection agency and consulting firm. He has closed over $500 million in M&A transactions as a CFO, consultant, and entrepreneur.