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How To Perform A Credit Check On Customers: A Small Business’s Guide

If you’re a small business owner, providing credit can be an excellent way to attract prospects and retain existing customers. When you extend credit, you give your customers an opportunity to pay their debt within a certain period of time. In other words, you’re in effect lending your own money to customers.

How To Perform A Credit Check On Customers: A Small Business’s Guide

However, the common risk for extending credit is that customers wouldn’t pay on time or not at all. When this happens, your small business may have to deal with late payments, invoice disputes, and bad debt write-offs, which are time-consuming and expensive. Because of this, it’s highly advised to conduct a credit check on customers.

Keep reading this article to learn how a small business could perform a credit check on its customers.

Get the Right Information about the Customers 

To get started with the credit check as a small business owner, you need to get the right information about your customers. Generally, the customers you may be dealing with is an individual, a company, or a partnership. 

That said, you should first make sure you identify your customers with their correct legal identity. This can be done by having all the details you need, especially when you have to get authorization to do a credit check. The common details to obtain include the following:

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  • Correct names
  • Email addresses and mobile numbers
  • Updated contact addresses
  • Taxpayer ID or Social Security number
  • Bank references
  • Trade references
  • Amount of credit requested
  • Authorization to access a credit report and many more. 

Obtain a Credit Report

Magnifying glass on colourful pie chart with "Credit report" tex

Now that you have the right information from your customers, the next step is to obtain a credit report on them. This is an essential document that provides small businesses a clear picture of their customer’s financial status and payment history.

When you have credit reports in place, you can also have an idea of how your customers handle their business and financial affairs, including how they pay for their essential services. Typically, most credit reports can include some relevant information about the customers such as the following:

  • A general credit score
  • Details of any defaults or adverse events that may have caused them to earn a bad credit
  • Information about any credit cards or loans they have
  • Previously unpaid debts but have been settled
  • Invoice payment history that shows how the customers pay and whether late or on time
  • Bankruptcies, court judgments, debt agreements, or personal insolvency agreements in the customer’s name.

As you can see, a credit report is one essential component when conducting a credit check on your customers, whether as individuals or other businesses.

Hence, if you want to acquire these documents quickly and with little hassle, it’s best to look for companies that offer self-serve business credit reports.

Do Some References Checks

Aside from credit reports, as a small business, you can also perform a credit check on your customers by asking them at least three references from people they know and companies for whom they’ve worked within a certain period of time.

Make sure to gather information about these references, so you can call them by yourself and ask for some information about your customers, such as the customers’ payment and credit history and any issues they may have with the customers while doing business with them.

Remember, reference checks can be a great opportunity to get to know your customers better, especially how they deal with other individuals and businesses. Besides, the more you know them, the more you can make an informed decision on whether to extend credit or otherwise.

Check For Red Flags 

Doing a credit check on customers isn’t only about obtaining credit reports and calling at least three references; it’s also about being aware of the red flags that can indicate a credit problem. Here are some red flags you need to keep a close eye on:

  • Check whether personal or business assets are pledged with collateral.
  • Find out whether the customers have outstanding credit relationships with others.
  • Know whether the customers’ business operations or the customers themselves are involved in a business that is at risk of seasonal turns.
  • Check how well your small business is doing to help you decide whether to grant credit to high-risk customers.

Bottom Line 

Just like how important credit rating is for entrepreneurs for financial reasons, the same level of importance applies to small business owners who want to extend credit to customers. Credit rating is also essential for conducting credit and plays a crucial role in whether to extend credit to customers.

When you do it, you’d also know and understand the level of financial risk associated with providing them credit. Also, it’d prevent or reduce your business’ chance of dealing with unpaid debts that could affect your financial health in the long run. 

Therefore, to conduct a credit check right from the start, keep these steps in mind so you have everything you need to know about your customers before you decide to give credit or otherwise.


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