If you are performing a service or selling a product to a client before getting paid, you are essentially extending them credit. A bank wouldn’t give you a loan or credit card without checking your credit-worthiness, and you should do the same with your clients.
There are a few ways to go about this and a few things to remember.
Why you should check credit-worthiness
The obvious reason to check the credit-worthiness of your clients is to minimise your risk when extending credit. When you are not paid on time it affects your cash flow – the lifeblood of your business. Trying to get the money you are due can be a painfully laborious process, even an expensive one, so it is better to prevent that nasty situation from happening in the first place.
Assess their attitude about costs upfront
One way to assess a customer is to have a frank discussion about costs right from the start, where you lay out all the facts, including realistic cost projections and the reasons behind the costs. It is understandable for a customer to try to negotiate at this point, but if they push back too hard or seem very concerned that could be a red flag. Obviously you can’t use this as your sole determining factor, but if there are already one or two warning signs then you should definitely think twice.
You can ask your potential customer for a bank reference to get a basic idea of how risky the bank thinks your potential customer is. You don’t need to base your decision solely on this, but it can provide a good place to start.
The ‘pro-forma’ approach
You can use a pro-forma approach to build trust between you and your customers. This is a good option if you want to foster long-term relationships with your clients. Pro-forma is where you require immediate payment for the first few invoices. Once the customer has proven their ability and willingness to pay you can begin providing credit.
Credit checking agency
Using a professional credit checking agency is not the simplest and cheapest option. However, if you need to check the credit-worthiness of a potentially large client then it might be an avenue to try. An agency will give you a proper risk assessment in situations where you stand to lose a lot if your clients don’t pay.
If you do the above, you should be able to weed out most of the chancers. However, this does not mean that you won’t from time to time struggle with a client that doesn’t pay on time. To further prevent this from happening you can use debit order systems whereby a third party debit order collection service automatically collects the money owed to you from your client and deposits it into your own account. If even that fails, educate yourself on how to get money owed to you. There are measures you can take when clients aren’t paying you, but it’s best to avoid those situations by checking their credit-worthiness first.