14 steps to monitor the creditworthiness of customers

11/02/2021

Offering credit terms to your clients is a great way to be competitive and increase sales, but it comes with big risks.

Arguably these risks are going to be even greater as we navigate our way out of this pandemic and start to see the real economic impact of it.

Customers who were once financially stable may suddenly have found themselves in cash flow difficulty through no fault of their own.

That’s why it’s more important than ever to monitor your customers’ creditworthiness to protect your business against late payments and bad debt.

Here are 14 tactics you could use to monitor the creditworthiness of your customers and protect your cash flow from late payment.

Account opening forms

Obtain all the necessary business information you need about a customer by asking them to complete an account opening form. This ensures you know who you’re selling to, with the information crucial to the recovery of invoices in the event they don’t pay on time.

Here are 8 essential questions you should ask your customers.

Credit reports

Credit reports can provide valuable insight into the financial status of your customers and their trading habits. Be sure to use credit reports throughout your relationship so that you don’t miss any sudden changes.

Here’s how to credit check a business.

Check for CCJs

Credit reports and the Register of County Court Judgments (CCJs) will reveal if your customer has any CCJs against them, which shows if they have a history of not making payments and whether you should exercise extra caution.

Join a credit circle

Another way to check the creditworthiness of your customers is to join a credit circle, where you can share and access important creditor trends with fellow companies.

Keep up to date with industry news

Keep a watchful eye on industry news too. The way different sectors are currently performing could indicate if a business is likely to experience any economic factors which could affect their ability to pay you. Especially in this current climate, some industries are more at risk than others.

Look at their payment reports

Another great resource for building a picture of your potential client is the payment reporting regulations, provided they are large enough to comply.

In April 2017 the government introduced new legislation that forced the largest companies in the UK to publicly report on their payment practices twice a year. This lets you see exactly how these big companies treat their suppliers.

You can look through the reports here.

Look at their filed accounts

Take a look at your customer’s filed accounts. The information provided could give you insight into their financial health. Late filings could be a sign of trouble.

Obtain references

Obtaining references can help to put your mind at ease when working with a new client, and also give you a better idea of how best to work with them.

You could ask your client to provide a bank reference, which will give you a basic opinion of how the bank views the customer in terms of risk.

Another really useful type of reference is a supplier reference. Given that they already work directly with your client, a supplier will be able to give you a great insight into what you can expect.

If you are going to include supplier references in your background checks, be sure to ask for several to give a fair and balanced view.

Search online

It is always worth doing a few quick Google searches. Larger companies in particular may have had news articles written around any bad payment practices or big changes to their business.

See if they’re a Prompt Payment Code signatory

Prompt Payment Code signatories pledge to pay suppliers on time and adopt good payment practices. If a company you are looking to work with has signed up to the Code they are likely to have good payment practices – although some are failing to meet the obligations.

Stay in touch

One of the best ways to spot any signs your customer may struggle to pay on time is to keep in regular contact with them. This will give you the opportunity to discuss any potential issues before they impact your cash flow, whilst additionally allowing you to build stronger relationships.

If your calls are suddenly going unanswered and you’ve left multiple messages or emails without a reply, it might be a sign that your customer is avoiding you and is unable to pay.

Here are some things you might want to cover in your courtesy calls.

Train employees to flag any odd financial behaviour

It’s important to make sure that all customer-facing employees have the necessary training to spot and report any odd financial behaviour.

Here are 21 warning signs that your customer can’t afford to pay you.

Trust your gut feeling

It could be a natural instinct, but more likely it’s a skill gained from experience. The more you work in credit control the easier it is to spot when your customers are stalling payment.

If you have a gut feeling that a customer is going to pay late you’re probably right. Learn to trust your instincts and, at the very least, treat these customers with caution.

Watch out for any sudden changes to the business

Whilst some sudden changes are to be expected when we’re in the middle of a pandemic others could be a warning sign. Some things you should keep a watchful eye for include any sudden changes to buying patterns, sudden stock or asset sales or even reduced service levels.

What should you do if you suspect a customer is a credit risk?

Before the order is placed:

If you have reason to suspect that a customer is experiencing financial difficulty before the order is placed you might want to request full or partial payment upfront to protect your cash flow.

After the order is placed:

If you are concerned about your customer’s ability to pay after you have offered credit you should put them on a watch list, monitoring them closely and contacting them at more regular intervals during the credit period to keep your invoice front of mind and identify early on whether the payment could be delayed.

When the invoice is overdue:

Once an invoice exceeds terms it’s vital that you work quickly to get back what you’re owed. The longer an invoice is overdue, the less likely it is to be paid. If you do not have the internal resource or expertise to chase the customer for payment, or your efforts aren’t working, you might want to consider outsourcing to a specialist agency, who will do it on your behalf.

If you’re worried that a customer isn’t going to pay we could help. Contact us today on 0800 9774848 to see what we could do for your business or get a debt collection quote here.