Why should small businesses credit-check new customers?

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Corporate debt collection is confronted with myriad challenges as technology, regulations, and demographics constantly change. Owing to today’s highly mobile society, it is more difficult to locate debtors than ever before. As a matter of fact, it is nearly impossible to effectively sort through the enormous amount of information available on individual debtors.

While there is no dearth of information about individuals in the digital age, finding the most accurate contact information for a debtor can often be fraught with challenges. Ultimately, successful recovery hinges on being able to contact the debtor. In the absence of current information about the debtor, it is almost impossible to contact them and recover their debt.

If you provide products or services, you probably issue an invoice once the service or delivery has been completed. When you run your business in this manner, you extend a line of credit (and goodwill) to your customers, unlike those who receive payment upfront. Performing a credit check on these customers is an easy and effective way to give you confidence that they will be able to make timely payments.

Likewise, a credit check is particularly important for small businesses as they may have difficulty recovering loss amounts if they neglect to do so.

Here we list some of the excellent reasons you should be credit-checking new customers as part of your onboarding process.

A risk assessment tool like this is essential

One of the biggest risks facing small and medium businesses is cash flow issues caused by poor customer payment behaviour. In the world of small businesses, cash flow is king, and most small businesses rely on a few repeat customers for most of their revenue. It is clear that attracting new customers is crucial, but attracting the wrong kind can be disastrous for your business.

A small business can end up insolvent due to just one or two customers not paying on a large invoice without the capital reserves, fiscal resilience, and easy access to lines of credit that larger businesses have.

Limits can be set using it

It can be tricky to set a new customer’s credit limit. When you offer them credit, you want to encourage them to buy larger items. However, the greater the credit amount you offer, the greater the risk.

The first step in deciding how much credit to offer should always be a business credit check.

Customers who request an increase in their credit limit are treated similarly. If you want to determine whether to increase a customer’s credit limit, you can run a credit check on them.

It keeps your supply chain moving

In a smaller business, margins are tight, and you may not be able to pay your suppliers due to one customer’s multiple outstanding invoices. As a result, your own supply chain cannot function, and you cannot fulfil your own orders.

Because most small businesses depend on repeat business and business relationships, being unable to deliver on order can damage the reputation of your business, even when it isn’t your fault.

It’s part of your ongoing credit monitoring process

 

A credit check is always a good idea to determine a customer’s creditworthiness and spot any red flags before they become a problem, but credit monitoring isn’t a one-and-done.

You gain valuable insights into the financial health of your whole supply chain, upstream and downstream, when you run credit checks on your current clients and suppliers.

Some companies only run credit checks on new customers, but it’s important to monitor the credit health of your entire customer base. It is indeed possible to run a credit check on an individual, a business, or both.

When scoping out potential new customers with respect to commercial debt collection, checking the overall creditworthiness of a potential new customer is a crucial check to make.

eCollect is one of the leading business debt collectors in Melbourne. As your debt collector, they work on commission, so you don’t pay anything upfront.

If you are a small business owner who struggles to collect unpaid invoices but also wants to credit-check your customers, consider hiring a debt collection agency. Get in touch with eCollect today so you can focus on growing your business.

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