What to Look Out for When Credit Checking Customers
Every company should credit check their potential customers prior to carrying out work with them; or at least credit check ones with higher value orders. There are specific things that you should look out for on a credit risk report that should give you an effective overview of your customer’s credit risk.
What should you look out for when credit checking customers?:
Make sure that you have the correct full legal entity of the customer. If you do have to take legal action to get paid, you will need to ensure you know who exactly you are trading with.
The company registration number will be a 7 digit unique number. This will identify the correct legal entity.
This may be the head office or trading address, some companies will use their accounts as their registered address so don’t be alarmed if it different from the trading address you have for your prospective customer.
For newly incorporated companies this should give you an indication of when they should have, or need to, file their accounts. If this has not been done it can indicate negative issues.
As it says on the tin, this will tell you the status of the prospective customer’s company: dormant, non-trading, financial statements too old, active, directors not appointed, company dissolved or in liquidation.
Credit risk rating
This will give you a credit rating for the prospective customer (the higher the number the least risk) and will usually have a statement spanning from ‘very low risk’ to ‘serious adverse’.
Previous rating history
View trends on their previous credit risk rating, companies whose risk has a downward trend (say 94 to 68) is higher risk than a company with upwards trend (32 to 54).
You may not see this with every customer, small to medium size businesses with a turnover of less than £6.5m, are exempt from filing full accounts. They can file ‘abbreviated accounts’ but you may see turnover, pre-tax profit and number of employees blank.
A county court judgement against your customer is most definitely a red flag in regards to your customer’s credit rating. However, a CCJ could be old and of a small value, so you may want to speak to your customer to make a decision whether to extend credit or ask for payment in advance.
Customers with an overdraft facility or loans will be registered in this section; it is very common for most companies to have some financial arrangement, however multiple mortgages registered may represent a higher than average risk.
The director’s report will give you the financial strength of the other companies a particular are or have been directors of.
If the report indicates the director is disqualified, you should not be trading with this company, a disqualified director can only be a director with the leave of the court.
Profit and loss
This section will give you an indication of a company’s profitability. I would suggest speaking to your accountant regarding the information you find here, as they will be able to provide the most comprehensive advice.
Changes to be aware of include:
- Directors resigning from the board
- Change in registered office
- Accounts overdue
If a customer is a subsidiary of another company, I would recommend checking the financial status of the holding company and other trading companies associated.
Once you have all of the information necessary it will then be time to make an informed decision whether to trade with a company or not, and this decision may not be as simple as a ‘yes they have a good credit score’ or ‘no they have a bad credit score’; there are many factors to take into consideration but having this information can mean the difference between losing profits to a bad debt or gaining a valuable longstanding customer.
Our support service can provide you with the credit risk reports as well as advice on how to interpret them in regards to trading with a customer. Sign up today!