In a perfect world, consumers will pay off their loans or debts as soon as they receive the bill, but we don’t live in a perfect world and there will always be customers who are unable or unwilling to pay their financial obligations. Fortunately, sellers can be proactive in determining the credit worthiness of their customers. Doing a little background research can go a long way in minimizing bad debt and late payments. The first step that should be implemented by merchants and other sellers is to establish a system of checking customer credit worthiness.

Cost Considerations

In checking a customer, it is important to relate the cost of the investigation to the potential value that customer can bring to your business. It simply makes no sense to conduct a thorough background research worth $600 on someone who is only going to buy a $500 product from your company. On the other hand, if the customer shows the potential to be a long-term client or a bulk client, then it is important to do the complete background check on their credit worthiness before you decide to do business with him.

There are two ways to conduct the credit check. You can do it yourself or hire an agency to do it for you. Basically, the steps will involve the following:

• Ask the client for their bank reference. It is essential to note that you might need to pay to get this and it can only be given with the client’s permission.
• Ask the client for several business references. Try to probe the customer’s level of risk by asking about the level of trade credits they receive.
•  Ask for their latest credit rating. You can access this information from credit bureaus.
•  Visit their business location personally to verify the authenticity of their business especially if you’re thinking of establishing a long-term relationship with them.

Most merchants who experienced dealing with action customers recommend creating a policy where you accept or reject the level of risk that the customer presents.

Risk Categories

 Use the information you obtain to quickly and accurately assess the risk that the customer presents to your business. You can establish their credit limit from this information. A lot of merchants adopt five risk categories wherein the top category means that the customer is “good for anything” and the bottom category where you only accept cash terms from the clients.

Most clients fall between the top and the bottom category. This is where the credit limit needs to be set. You should also determine the payment terms (i.e. 30 days, 60 days, etc) you can extend to the client. These terms should be competitive with the standard practice in your industry because you certainly don’t want to lose a valuable client because of your unreasonable demands.

 Ultimately, everything comes down to balancing the need to protect your interest by doing research and the need to satisfy the customer’s requirements. Checking your customers’ credit is the best way to do just that.