The late payment of invoices can result in cashflow problems, reduced profits and extra work in recovering the loss. So how can you ensure potential customers will pay you and pay you on time?
The answer lies in credit checking. This enables you to find out about the customer’s credit history and their financial reliability.
One of the best ways of doing this is to require potential customers to fill in a credit request form. This should includes details such as the full name and legal status of the business, bank details and the names of the managing director, finance director and person responsible for payments, as well as a request for consent to make bank reference checks, credit checks with a credit reference agency, and obtain at least two trade references.
A basic report from a credit agency can tell you if your prospective customer has ever been taken to court for non-payment, if they paid any summons received, if they are registered at the address they gave you, and how promptly they pay their other accounts.
There is normally a charge for bank references, but you should be able to reduce this by writing to the customer’s bank and asking them to reply via your bank. Alternatively, you can ask your bank to handle the enquiry on your behalf.
When you request a bank reference, you need to ask specific questions, so that the bank knows the information you require. The same applies to trade references, from whom you should be requesting the level of credit they allow for the customer and if payments are regular and on time.
If a business is new and therefore has no credit history, you could run a personal credit check on the owner, although you will need to obtain their permission first.
So now we have looked at credit checking your customers, how can you improve your own credit rating? Well, there are a number of things you can do.
The first, and most obvious, is to always pay on time. The payment experiences of your suppliers form a key part of your credit profile.
Secondly, ensure that your business is listed in telephone directories, and, if you are a limited company, that your company registration details are up to date, and your accounts filed on time. This will all help to confirm that your business is genuine.
Next, aim to build relationships with companies that will establish credit for your business and report positive information when asked for a trade reference request.
And don’t forget about yourself! As stated above, people have the option of reviewing the personal credit profiles of key people within your business, so it is important to keep on top of your finances.
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