Why company credit check?

A company credit check is a vital component of your trading relationships and ensures that you are confident of the stability of the business you are dealing with and helps minimise the risk of incurring bad debts, particularly from new, "unknown" customers. When you allow customers time to pay, it should be a conscious decision - 'we believe this customer can and will pay us on time' - based on knowledge, not an accident of selling.

If you knew a customer paid others very late, would you expect payment on time?

If you knew a customer was about to go bust, would you allow 30 days credit?

So it makes sense to find out and undertake some further research. Export credit managers know that sales are increased, not reduced, by checking financial worthiness because sales efforts can be intensified with sound customers and not wasted on a mass of unknown prospects. There are many competitors for your customers' funds and a supplier less tolerant than you may have started legal action or even winding-up proceedings.

You need important information to find out how others have fared recently. There are two powerful reasons for managing risk:

Commercial: future sales are more reliable.

Financial: profit is increased by fewer bad debts and lower borrowings.

Which Accounts?

Undertaking a review costs time and resources. You can reduce the cost by getting small orders started quickly with a 'Fast Start Limit' for any new accounts. Of course there is a risk but £500, say, may not hurt if it is lost. However, further orders need proper report.

Use the 80/20 rule to identify the few accounts which buy most of your sales (list accounts in descending order of value until they add up to 80% of the total). Give those a full report and only brief requests on smaller ones. Always review customers by size of debt, not alphabetical order, so you never suffer a large bad debt through lack of time.

Status Reports from Agencies
Agencies should give you full customer details, financial results, payment experience of other suppliers, county court judgments, registered lending, etc. and a recommended rating. Agencies may deliver instant reports through on-line terminals as well as by post or fax. Use an agency with a complete database and a fast response.

Bank References

As part of the account opening process, the application form includes a reminder that bank references may be requested from time to time. It can be useful to obtain a reference on a new customer when starting a trading relationship.

A bank reference, known within banks as a ‘status enquiry’, is a bank’s opinion as to the ability of one of its customers to meet a specific financial commitment. A bank will only give a reference if it has the written permission of its customer and normally require a new authority to reply to each and every enquiry. There is a fee for providing references which is typically met by the business making the enquiry. Businesses should use the following steps to request a bank reference:

Send the whole form to the customer and request they complete the consent section and return the form to you.

Complete a request and consent form as fully as possible.

Send the form directly to the customer’s bank using the attached letter.

The bank will base its reply on its knowledge of the financial standing of the customer in question and may also advise enquirers that they should not rely solely on the bank’s reply when making their decision. Banks use only standard phrases (e.g. 'undoubted for your figures’, ‘respectable and good for your figures’, ‘customer not known to us for long’, 'capital/resources fully employed', 'cannot speak for your figures' etc.). Anything less than 'good for your figures' is a guarded warning.

Bank references should be used only for small value decisions or to support other reports. Remember that a bank's loyalty is to its customer, not the enquirer. Requesting references from other professional advisers to a potential customer could be considered e.g. their accountant. Again, the customer will need to give permission.

Trade Reference

Use only referees selected by you and not by the customer. Customers are not going to offer names of dissatisfied suppliers. Make it easy for the respondent with a printed form, tick-boxes and prepaid envelopes, as shown in the example below

Name and address of business
How long known (years/less than one year?)
What terms (30 days/60 days /longer please specify)
Sales per month (£1000/£1000-£5000/over £5000)
Payments prompt? (up to 60 days late?/very late?)
Name of payments contact
Other useful information
Thank you for helping. We will reciprocate at any time.
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Account Experience

Existing customers provide valuable up-to-date data. Any slowing payment trend or spurious queries are triggers for a further review. Computer systems can give early warnings of changes.

Visits to Customers by Company Staff

It can be useful to assess premises, staff morale, payment system and company progress. You may hear 'going through a difficult phase', 'a bit of a cashflow problem', 'have to cut back on orders' etc. These should all ring alarm bells.