How to Check Your Clients Credit Rating

Businesses depend a lot on cash flow. No matter how much money is given to clients and how many days they are given to pay, a late payment could be very adverse. It could impact the business immensely in terms of cash flow. This could impact on how you conduct your dealings and can slow down business growth.

Why You Should Check a Clients Credit?

It’s because of this that receiving payments on time from your customers is definitely important. The question would be how do you know who is suitable to be lent money? Or who is good at repaying the money? This is where the credit rating comes in. The credit rating simply shows how good your client is at making sure that they repay their debts and if they fulfil their debt as previous agreed upon. Now you might wonder how do I check my client’s credit rating? Here are some of the methods you could use:

How to Check a Clients Credit Rating

– Credit Checks

A credit check would help you assess the reliability of the customer. They will allow you to know how long it took your customers to repay their funds as well as whether they fulfilled their entire payment. It usually doesn’t take long to do a credit check but then again it depends on the client you are dealing with. Either way, it’s beneficial for the business and can help ensure that the cash flow doesn’t get disrupted. Credit reports for most individuals are available and can normally be purchased from the main credit reporting agencies such as Equifax or TransUnion.

– Accounts

This might be a bit more complicated than the other methods because some knowledge of accounting is required. This also depends on the clients because not every client will have published their accounts, but for those who would have, you can take a look at them. This is where some knowledge is required because you’ll need to know how to apply formulas such as the gearing ratio, current ratio and the acid-test ratio to the data. The advantage though is through the accounts you’ll get to know the cash flow of the business and whether they are able to repay you or not.

– Bank References

This is not always an advised method to use, but it can work for you. Banks always have information about their clients who have accounts with them or who have conducted business with them. You could ask your potential client to provide you with a bank reference so that you could get an opinion based on the bank’s review of the customer. It has to be noted that this method is not a definite way of ascertaining the reliability of your client because it may be their first time doing business hence might not have a bank reference.

– Pro Forma Invoicing

This is a great way to build trust among you and your clients. The pro forma approach involves you to ask the client to make payments after an invoice is produced in the first few transactions. If they fulfil these payments, it provides you evidence that the client could be trusted with a loan/credit. This is best used for those who encounter start-ups looking for some credit because they have no other way to prove that they can be trusted.

– References from Suppliers

Although not as trustworthy, this is one of the easiest ways to assess the credit rating of your potential client. This works because the suppliers deal with the client directly in their dealings on almost a day to day basis, so who better than them to tell you whether the client can be trusted or not and whether they pay their debts on time or not? Like any other method, this also has its downsides in that the client might only use one supplier as a reference or might have a good relationship with only one supplier out of their other many suppliers. To curb this problem, always remember to ask for multiple references from different suppliers.

– Using an Agency

Not just any agency a credit checking agency. These agencies are made up of professionals whose sole job is to assess the credit rating of businesses. They can also provide you with a risk assessment on the client if you were to ever offer credit to the person/business. It has to be pointed out that this method is probably the most expensive on the list. These agencies don’t come cheap, so it’s best to use it on the larger clients with whom you stand to lose a lot of money if you were to give them a loan.  This post is from Eimear at Fluke Ireland 

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