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A common risk for any business is that customers will either fail to pay on time or fail pay at all. To minimise this risk, you may wish to credit check 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 getting 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 entity. This could be:

  • an individual;
  • a company;
  • a partnership; or 
  • another entity (e.g. an incorporated association). 

When you sign up a new customer, ensure that you collect: 

  • contact names;
  • mobile numbers;
  • email addresses; and 
  • up-to-date contact addresses. 

Do your Reference Checks

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

You should obtain a credit report from a specialist credit company. These are relatively inexpensive and will provide you with 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 give you an indication of 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. 

What Should I Worry About in a Credit Check?

You should be wary of any general low credit score or reports of defaults. Defaults will generally include debts of $150 or more, including utility bills or loan payments that are 60 days or more 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 to manage your risk if you do decide to do business with them. 

For example, you may be able to apply tighter trade terms, such as requiring:

How to Recover Unpaid Invoices

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.

Download Now

Key Takeaways

Customers that fail to pay their debts are a risk for your business. You should take the time to screen new customers before doing business with them and find out about any potential risks. This will minimise the chances of unpaid debts affecting your business. Checking trade references and conducting credit checks will arm you with information to make the right decisions about whether you should engage with new customers. If you have any questions about credit checks for customers or need assistance with debt recovery, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page. 

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