Verify creditworthiness
When checking credit and references, look for signs of stability (or lack thereof). You can do this by looking at a credit report, checking references, or both. The time you spend verifying creditworthiness should be proportional to your risk exposure. Larger credit lines merit a more thorough credit check.
Business Customers
Checking a credit report usually takes less time and provides more comprehensive information than checking references.
You may also choose to check references. Talking to someone that actually does business with the customer can furnish insights that a credit report won't. Request references from both a bank and two or three suppliers. Expect good references — why would the customer give you bad ones? — and ask specific questions of them, such as:
- how long have you been in a business relationship with this customer?
- what is the largest amount they have owed you?
- how many days does it take them to pay?
Find out how long your customer has been in business. Companies with a long and prosperous history may be a safer credit risk, but don’t be fooled. There are plenty of skillfully run young companies, and countless poorly managed ones that have been limping along for years. Look at this information in light of the other data you have.
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Individual Customers
If you bill after a service has been delivered, like a dentist or a contractor would, then you extend credit to individuals. You can run a credit check on a customer, with their permission. Credit agencies like Experian, TransUnion, and Equifax provide reports that detail the payment history on many accounts and highlight late payments.
You can also ask customers to fill out a credit application. Ask whether they own or rent their home, how long they have been at their current address, and what their previous address is. Signs of frequent moves or job changes may indicate unreliability, so be on the lookout for this.
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