How to Check a Customer's Credit Worthiness
Before banks extend credit, they verify the prospective borrower's credit history and ability to repay, among other things. That's not as common in the $2 trillion unsecured, or trade, credit market, says Alex Coté, vice president of marketing for Cortera, a credit-risk monitoring service in Boca Raton, Fla.
"I recently spoke with a woman whose business was running into trouble because she wasn't monitoring her customers' payments," he says. "Everything was very late--60 days or more. She didn't realize it. They were looking at layoffs and, really, the problem was that they weren't collecting."
To keep an eye on your customers and their ability to pay what they owe, Coté gives this advice:
Require a credit application. Every business requesting credit should complete a credit application that includes basic information like address, contact information and tax ID number, as well as references from other businesses that have extended credit to them. It's unlikely a business will list a contact that will say something negative, but if the company has trouble coming up with three or four good references, it could be a red flag.
Be sure to check the applications, too, Coté says. Too many small companies collect the data and then fail to verify it, he says.
Check publicly available information. The company's social media streams, the news release section on its website and information available through simple search engine exploration can help you determine whether the company is having problems that may affect its ability to pay. Publicly traded companies also must regularly file fact-filled reports about the state of the business with the Securities and Exchange Commission. These are usually available on the company's website or through sec.gov, using the site's EDGAR service.
Use credit evaluation tools. Business credit evaluation tools provide different information at varying costs. Cortera and On Deck Capital, a business lender based in New York City, both offer free tools. Dun & Bradstreet Credibility Corp. offers DNBi CreditAdvisor products that include credit reporting and monitoring. Fees range from $179 for one company to $1,499 for 15 companies. Cortera offers a credit monitoring tool for small businesses, which includes information on privately held companies and a community-based approach to intelligence gathering, for $99 per month. Consumer credit giants Equifax and Experian also provide credit monitoring tools for small and midsize businesses.
Gathering information about customers' cash flow isn't just something you do at the outset of a relationship, Coté says. Watching out for problems that could affect your customers' ability to pay you can help you avoid getting burned.