Our Fractional Finance Director, Eleanor Antonio recently commented in our Financial Health 101 webinar that every business owner should always conduct a credit check on potential customers. It was such a pertinent point we wanted to share four key reasons to conduct a credit check on potential customers.
Running any successful business requires navigating challenges and solving problems that inevitably arise. A little work upfront can prevent significant issues later on. When it comes to safeguarding your business from financial risks, credit checks should be a priority.
While it might feel like an additional step that could slow things down, the benefits of running a quick credit check far outweigh the drawbacks.
Here are our top four reasons to conduct credit checks on potential customers:
1. Reduce Financial Risk
The first of our reasons to conduct credit checks on a new customer is to assess and reduce financial risk related to late or non-payment. Once you have insight into a potential customer’s payment history, you can make informed decisions about how to proceed. For example, if a potential customer has a history of late payments, you may still choose to work with them but require an upfront payment or deposit to protect your cash flow.
2. Strengthen Customer Relationships
While credit checks are primarily about protecting your business, they can also help you build stronger relationships with your customers. Understanding their financial position allows you to set realistic and mutually beneficial payment terms. This helps develop a sense of trust and mutual understanding.
A good example is when a customer has an excellent credit history, you might offer them more flexible payment options when trialling a new product – something you’d be less likely to do for a customer with a poor credit history. This transparency and flexibility can help establish trust and foster long-term business relationships.
3. Improve Cash Flow
Cash flow is the lifeblood of any business. By understanding potential payment issues in advance, you can plan ahead and mitigate risks. If you identify customers with a poor credit rating, you can adjust payment terms, request advance payments, or establish stricter credit limits to avoid disruptions. This approach doesn’t mean avoiding business with customers who have weaker credit scores, but rather proactively managing associated risks.
4. Prevent Fraud
We all know fraud is an unfortunate reality in the world of business, and conducting credit checks can serve as an early line of defense. A credit check not only verifies a potential customer’s creditworthiness but also confirms whether a business is legitimate and financially responsible. If a credit check raises red flags, you may decide to require upfront payment or in some cases, avoid engaging with that business altogether.
A Simple Yet Powerful Business Practice
Taking the proactive step of conducting a credit check should be a standard part of your customer on-boarding process, particularly for high-risk or high-value customers. This proactive step helps you build stronger relationships, stabilise cash flow and protect against fraud – all of which contribute to your business’s long-term success. One simple action = multiple benefits for resilience, stability and growth.
While implementing a credit check system may seem time-consuming or costly, it is time well spent. However, for some businesses, it might not be commercially viable to conduct credit checks on every new customer. Instead, focusing on larger or risky clients can provide the best balance between efficiency and protection.
A Fractional Finance Director would prioritise setting up a targeted credit check system as part of a broader strategy to grow and protect your business. Get in touch to find out how easy it is to benefit from the skills and expertise of one of our Fractional Finance team.
Photo by David Trinks on Unsplash
