Why Credit Check ?
A 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 was about to go bust, would you allow 30 days credit?
A must for a credit check.
If you knew a customer paid others very late, would you expect payment on
time? Again, a must for a credit check.
So it makes sense to find out and credit check. Export credit managers know
that sales are increased, not reduced, by checking credit 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 credit check information to find out how others have fared recently.
There are two powerful reasons for managing credit risk:
Commercial: future sales are more reliable.
Financial: profit is increased by fewer bad debts and lower borrowings.
Credit Check which Accounts?
Undertaking a credit check costs time and resources. You can reduce the cost
by getting small orders started quickly with a 'Fast Start Limit' for any
new accounts with no credit checking. Of course there is a risk but £500,
say, may not hurt if it is lost. However, further orders need proper checks.
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 credit check and only brief checks on smaller ones.
Always check customers by size of debt, not alphabetical order, so you never
suffer a large bad debt through lack of time.
Credit Check Status Reports from Credit Agencies
Agencies should give you full customer details, financial results, payment
experience of other suppliers, county court judgments, registered lending,
etc. and a recommended credit 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 credit application form includes
a reminder that bank references may be requested from time to time. It can
be useful to obtain a credit 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:
Complete a request and consent form as fully as possible.
Send the whole form to the customer and request they complete the consent
section and return the form to you.
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
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How long known (years/less than one year?)
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What terms (30 days/60 days /longer please specify)
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Sales per month (£1000/£1000-£5000/over £5000)
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Payments prompt? (up to 60 days late?/very late?)
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Name of payments contact
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Other useful information
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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 further credit checks. Computer systems
can give early warnings of changes.
Visits to Customers by Credit or Sales 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.
Credit Check is also know under
credit_check
credit_check_uk
online_credit_check
uk_credit_check
company_credit_check
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