As a business owner, it is important to ensure that your new customers are financially reliable and capable of fulfilling their payment obligations. The phrase “good for the money” is a common one in business, referring to a customer who is likely to pay you on time and in full. But how can you determine if a new customer falls into this category? Here are some key steps to help you make a more informed decision:
- Conduct a Credit Check
A credit check is one of the most straightforward ways to assess a customer’s financial standing. Credit reference agencies can provide a comprehensive credit report, detailing their history of paying invoices, outstanding debts, and any legal actions such as County Court Judgments (CCJs) or bankruptcies. Regularly reviewing credit reports for your customers can help you identify potential risks early.
- Request Trade References
Ask your new customer for trade references from suppliers or other businesses they have worked with. Speaking directly with these contacts can provide insights into their payment habits, reliability, and the level of business they are accustomed to handling. Keep in mind that a reluctance to provide references could be a red flag.
- Evaluate Financial Statements
If you’re dealing with companies, consider requesting copies of their recent financial statements. These documents, such as profit and loss accounts and balance sheets, can offer valuable information about their cash flow, liquidity, and overall financial health. However, it’s essential to interpret these documents carefully or seek advice from a financial expert if needed.
- Check for Public Records
Public records can reveal a lot about a customer’s financial status. You can check the Companies House website to review the financial filings of limited companies, including annual returns and directors’ information. You can also check whether directors have a history of company failure. For individuals or smaller businesses, consider looking at other public databases for any bankruptcy filings or CCJs.
- Start with a Trial Period or Deposit
If you have concerns about a new customer’s ability to pay, consider starting with a smaller order or requiring an upfront deposit. This approach allows you to gauge their reliability without exposing your business to significant risk. As your relationship develops and trust is established, you can gradually increase the terms of engagement.
- Use Credit Insurance
Credit insurance is a tool that can protect your business against non-payment. It covers the risk of your customers failing to pay due to insolvency or other reasons. This insurance can be particularly beneficial for businesses dealing with large contracts or high-value customers.
- Trust Your Instincts but Verify
While data and formal checks are critical, don’t ignore your instincts. If something feels off during your interactions with a potential customer, take the time to dig deeper. Ask more questions, seek additional references, or set stricter payment terms to protect your business.
