How to credit check a company

14/08/2019

Credit checks are key to protecting your business against the risk of late payment and bad debt.

By credit checking companies, ie prospective or current commercial clients, you’ll gain insight into their ability to keep up with payments, their trustworthiness when it comes to paying on time and any other potential red flags with regards to their financial situation.

Your process for assessing a client’s creditworthiness should be comprehensive, else you could find yourself in a very difficult position if you provide goods or services to companies that don’t or can’t afford to pay their invoices.

If you’re new to credit terms and want to know how to credit check a company, or you’re simply reviewing your current processes, these methods for building a full picture of a client’s credit profile will help you stay protected.

Credit reports

Obtaining a credit report is the most popular way to credit check a company and is essential for gaining a full insight into their trading habits.

A credit report will contain basic information about the company, such as their corporate address, parent companies, key personnel etc.

It will also give you detailed information with regards to business accounts such as banks, credit cards and suppliers. You can find out details of when accounts were opened, payment history, outstanding balances and past due accounts.

A credit report will also include information in the public domain such as bankruptcies, lawsuits and court judgments.

Most credit reference agencies include a credit score that allows you to benchmark the company’s associated risk. Every provider is unique and may calculate and showcase these slightly differently.

Reports can be purchased from a number of suppliers, and many offer subscription services that let you request a number of reports every year. This is perfect if you regularly trade on credit terms.

Some credit reference agencies may simply base their decision on whether the credit score meets their expectations when credit checking a company. While this can be a good starting point, it’s important to scrutinize the report for any red flags or unexplained issues that could be worth checking.

For many companies, the credit report may be the only method they use to measure risk. While this may work well for your company, if you’ve had trouble with late payments and bad debt in the past, there may be some further steps you could take to make you feel more secure.

References

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

Research

Doing a little manual research of your own is another great way to build a clear picture of a company’s risk factor. There are several dedicated resources to help you gain more insight into another business’s trading practices.

The Prompt Payment Code aims to cater to this need. Companies who sign up to the Code commit to several obligations, such as paying 95% of all supplier invoices within 60 days – or 30 days where the supplier employs less than 50 staff.

If a company you are looking to work with is on the Code they are likely to have good payment practices – although some are failing to meet the obligations.

Another great resource for building a picture of your potential client is the new 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.

Finally, it is always worth doing a few quick Google searches. Larger companies in particular may have had news articles written around any bad practices.

‘Pro-forma’ approach

If you’re working with a relatively new company with little trading history, or there’s something that has come up during your search that is making you a little more cautious, you may want to take a pro forma approach.

This can help to build trust by asking for immediate payment of invoices on the first few transactions, before you provide the goods or services.

It gives clients a chance to prove their trustworthiness and gives you peace of mind.

Still struggling with clients who haven’t paid? For more information about how we can help as a commercial debt collection agency, contact our team today on 0800 9774848 or email collections@hiltonbaird.co.uk.