A common risk for any business is that customers will either fail to pay on time or fail to pay at all. To minimise this risk, you may wish to complete a credit check of new customers for any financial issues before providing them with credit, goods or services. This article will outline:
- the information you will need to screen new customers;
- how to do a credit check; and
- warning signs to watch out for.
Get the Right Details
When collecting details from a new customer, ensure that you:
- identify them as the correct legal entity; and
- have all the details you will need if any debt issues arise.
Customers may only provide their business or trading name, but you need to know the correct legal entity. This could be:
- an individual;
- a company;
- a partnership; or
- another entity (e.g. an incorporated association).
Do your Reference Checks
Before providing goods or services to a new customer, you may wish to conduct a reference check. Ask your new customer to provide at least three recent trade references from individuals or businesses they have worked with within the past two years. Collect contact names and numbers and contact each reference. Ask for details about:
- the customer’s payment history; and
- any issues or concerns the reference may have had while working with the customer.
Pay for an Expert Credit Check
Before working with a new customer, you should obtain a credit report from a specialist credit company. These are relatively inexpensive and will give you a full picture of a company or individual’s financial status and payment history. This will show you if the company is registered and whether the individual or company can pay their debts. Credit reports will indicate how that business pays their suppliers, including payment for essential services such as phone and internet. Credit reports will usually include some or all of the following:
- a general credit score giving a ranking or indicator of the customer’s credit rating;
- details of any credit cards or loans the customer has;
- a summary of any defaults, enquiries or adverse events that may have contributed to a poor credit score (keep in mind that credit defaults remain on a credit report for five years. If the debt is paid, the listing stays, but the credit report will be updated to show the payment made);
- any credit the customer has applied for (including where an individual customer has guaranteed a loan);
- arrears brought up to date (i.e. debts that were unpaid or overdue and have now been paid or settled);
- any bankruptcies, court judgments, debt agreements or personal insolvency agreements in the customer’s name;
- invoice payment history showing the customer’s pattern of payment and whether late or on time; and
- any Personal Property Securities Register (PPSR) registrations (these will show any claims against the goods or assets of the customer. Any such claims could impact your ability to get paid if the customer becomes insolvent).
Many credit report providers also offer ongoing updates so you can be alerted by actions such as an existing customer going into administration or receiving a court summons.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
What Should I Worry About in a Credit Check?
You should be wary of any general low credit scores or reports of defaults. Defaults will generally include debts of $150 or more, including utility bills or loan payments that are 60 days overdue and where debt collection activity has started. These indicate that the new customer may have difficulty paying your invoices.
What Should I Do About a Bad Credit Report?
You should ask the customer for more information about any defaults or low credit scores. They may be able to give further information that addresses your concerns. Knowing a customer’s credit history will also help you manage your risk if you decide to do business with them.
Key Takeaways
If you have any questions concerning what to do if you receive a bad credit report on your new customer or if you have unpaid invoices, our experienced disputes lawyers can help as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
You can obtain a credit report from a specialist credit company, which will provide a history of your new customer’s financial status and payment history.
You are entitled to ask new customers to provide recent trade references from individuals or businesses they have worked with within the past two years. However, there is no strict legal requirement that your customer provides these references.
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