When you start working with a new client carrying out a credit check can save a lot of hassle later.
There are few things worse than being owed money, especially in tough economic times.
We all have bills to pay, wage runs to make and other business expenses. So getting paid on time is crucial for the prosperity of any business… big or small.
But when you’re starting out or a growing firm, getting the cash in is vital not just to thrive but possibly to survive.
And one of the biggest challenges small business owners face is knowing how to trust new clients. Will they pay? Are they going to pay on time? Will chasing money become more hassle than the job itself? Is it possible the new deal ends up in court?
These are all genuine and very real fears that business leaders go through. So what safeguards can be put in place to help? How can we check out future clients before committing to a deal?
Credit check reports
Getting a credit report on a prospective client is a great place to start. You can buy these from the three main credit reporting agencies (Experian, Equifax or TransUnion). It’s so easy to get a credit check and a worthwhile investment.
If the business is owned by a sole trader, it’s likely that their personal credit rating is reflective of their professional credit rating. An acceptable credit rating it usually 75 or higher.
You can also go down the route of hiring a credit checking agency – but these usually come at quite a price. A common tactic is to use this method for larger customers where you stand to lose a decent chunk of money if they fail to pay.
Another option is to ask your new customer for a bank reference. This presents the bank’s opinion of the risks involving any contract or deal being struck.
Of course, this shouldn’t entirely form your decision on whether to proceed, but it could help.
Check Companies House
If you still aren’t satisfied and you want to do some more digging yourself, you could always trawl the customer’s accounts that should be available online. You can get these at Companies House.
By applying some basic accountancy skills, you can see how likely the customer is to pay on time if given credit.
You can ask your accountant to take a glance at the accounts; they will see things in seconds that you might not see at all. Getting a professional opinion would be a good idea if you’re uneasy and feeling worried.
Finally, perhaps you’ve gone down the official routes and are looking at a more relaxed and personal touch.
They say try before you buy, so why not do a small job and test your client’s paying skills that way? If they pay up on time, it’s a good sign going forward. If they don’t, it could be a huge red flag and save you lots of future heartache.
New client top tips
- Don’t give extend credit automatically to a new client and customer.
- Take partial payment in advance. It’s OK to ask for a deposit or retainer upfront.
- Invoice promptly. Sending an invoice promptly sends a clear signal that you’re on top of your finances. It also helps your cash flow as you effectively add extra payment days, which isn’t great for business.
- State your payment terms visibly and clearly. Say, ‘payable within 30 days’ or ‘due date…’ rather than payment on receipt.
- Reward customers for prompt payments. It is acceptable to offer small discounts, such as 2%, to clients who pay within 14 days. If you think this will help speed up payment, it’s worth trying.
- Follow up procedures. Set up a system for flagging late payments if you need to. Start with a quick call as some people genuinely forget or may have not seen the original invoice. If that doesn’t work, then send a letter requesting payment. If you receive no response after two or three attempts, you can either write off the invoice as a bad debt.