Running Credit Checks on Customers

By Ben Gran

One area of cash flow management where businesses often face special challenges is dealing with slow-paying or delinquent customers. When customers don't pay their bills, a small business is more likely to suffer because it often lacks the large cash reserves or widely diversified revenue streams that bigger companies tend to have. This makes it that much more important to run credit checks on their customers. When an invoice goes unpaid for months, it can stop cash flow dead in its tracks. Before you commit to doing business with a new customer, consider running a credit check on them to make sure you're confident in their ability to pay their bills.

However, running credit checks on your customers can be a sensitive issue, and there are various considerations to keep in mind, such as permissions and privacy issues.

Here are few key points to keep in mind when you're running credit checks on customers for your small business:

Why Credit Checks?

Small businesses often decide to run credit checks on new customers to make sure the customers are a good risk to pay their bills. This is especially important when entering into a large purchase agreement or a long-term contract, or when offering financing to a customer. Small businesses cannot afford to lose money and experience decreased cash flow from customers who don't pay or are slow to pay their bills. If a customer has less-than-perfect credit, you can either choose not to enter into a business agreement with them, or you can use the results of the credit check as leverage to ask for more favorable payment terms. For example, a customer with bad credit could be asked to pay a larger deposit upfront.

When You Should Run Credit Checks

Running credit checks on customers should not be taken lightly. You need to have a permissible use for the credit check information. According to the Fair Credit Reporting Act[1], credit checks can only be conducted for legitimate business needs such as credit transactions, account review or underwriting of insurance. Another good reason for running credit checks is prior to entering into a long-term financial contract.

Deciding whether to offer credit to a new customer or whether to enter into a long-term business agreement isn't always easy, but it can be simpler and more transparent if you have a good idea of whether or not your new customer is creditworthy. Know the rules for when and how to run credit checks on your customers. Use trusted credit-reporting agencies to run instant credit checks, and consider using longer-term services like ongoing credit monitoring.

How to Run a Credit Check

First you need to get permission from the customer—in writing—before you run a credit check. Then use a major credit-reporting agency like Equifax, TransUnion or Experian to actually run the credit check. These services charge fees that range from $8 to around $20 per credit check[2].

The credit-reporting agency will give you results in the form of a ranking of one to nine, where one means the customer is more likely to pay debts on time, and nine means that the customer likely has a lot of late payments and bad debts. This should make it easy for you to quickly evaluate whether you want to do business with a new customer, or whether you might want to ask for more stringent payment terms to ensure that your company gets paid. These credit-reporting agencies also offer a wider array of business credit services[3], like public records of critical business information such as liens and judgments, as well as corporate profiles for high-risk credit decisions.

Running credit checks on potential customers can be a great way to protect your business from cash flow problems that arise with doing business with customers who may be a poor credit risk.

About This Author

Benjamin Gran is a full-time freelance writer specializing in blog articles, white papers, technical writing, speech writing and other business writing.


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Important Legal Disclosures and Information

  1. http://www.consumer.ftc.gov/sites/default/files/articles/pdf/pdf-0111-fair-credit-reporting-act.pdf

  2. http://www.inc.com/guides/2010/12/how-to-run-a-credit-check.html

  3. http://www.experian.com/small-business/business-credit-risk.jsp

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