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The B2B Credit Checklist: What to Know Before Extending Credit

Businesses rely on clients to pay their bills, but as many CFOs know all too well, clients will frequently take their sweet time paying invoices as part of their cash-management strategy, because their working capital is taking a hit from their own late-paying clients, or because they are in dire financial straits. Whatever the reason, companies need to do what they can to limit their exposure to such credit risk.

Any finance department that has dealt with a pile of overdue invoices knows the frustration and potential damage late payers can bring. To avoid such problems in the future, business executives should revisit their process for extending credit and make sure employees are aware of the company's policies. Otherwise, you will continue to experience delinquent payments and the risk of invoices that never get paid. 

Why Are These Policies Important?
Companies that fail to implement B2B credit worthiness stipulations before taking on a new client will hurt their ability to pay their own bills.  Rather than take that chance, company leaders should ensure the clients they are about to do business with have their finances in order and will be able to make their payments in a timely fashion. This guarantees your company's own fiscal health won't be put at risk if you partner with a firm that doesn't pay what is owed.

To be sure, having strict credit requirements doesn't merely ensure a company will be paid on time - it also limits their need for a lawsuit. Businesses that turn to litigation as a last resort when it comes to collecting what is owed face concerns, such as the time and money that will be spent on such matters, as well as the fear they may not actually be able to collect the full amount they're owed, or even some of it. Indeed, if the likelihood of recovering past-due bills is only 50 percent, a company may waste valuable resources on a lawsuit and never even see the funds it set out to collect.

With the economy still uncertain, companies have to balance their need for acquiring new business and their need to get tough on risky customers. Not every client needs to be scrutinized - companies have to weigh the time and effort for evaluating a client's credit worthiness as well as the risk of turning away a potential client. But in most cases, organizations can take additional precautions when it comes to doing business with new clients, short of investing in underwriting services. 

What to Consider When Determining Credit Worthiness
There are multiple factors to consider when your business is extending credit to new clients. Consider the taking the following actions as a matter of routine if you don't complete them already.

• Require a customer application. A company needs to know what type of organization it may be extending credit to, making an application an essential part of the process. Providing credit to a client that business leaders don't know anything about may significantly increase a company's risk of accumulating past-due bills or not getting paid at all. Entrepreneur magazine suggests prospective clients should be required to fill out applications that detail all important company information, bank references, trade payment references, business bankruptcy history and personal guarantees from the company owners. This will provide your company with an overview of a potential customer's operations and current situation, and could help you find reviews that factor into your final decision.

• Check credit history. In addition to an application, potential partners should be required to reveal their firm's credit history and references. Companies that refuse to provide this information or have difficulty finding the necessary number of references could have had trouble making payments in the past, making this something to look out for when your company is reviewing credit worthiness. Some businesses also use credit evaluation tools to find credit reports and streamline this process. Also check official credit reports, such as those provided by Dun & Bradstreet or Experian. Checking the credit history of public companies is much easier, of course, so have your employees take the time to look through public filings.

• Call references. Some businesses fail to ever check up on a prospective client's references, which puts them at risk if these references don't have positive things to say, or if they don't exist at all. While it may seem obvious, asking references about a company's history of making payments on time and in full can be overlooked. Ensure your firm consults all references provided, and if you're able to get bank information, call it up and see how much cash the company has on hand.

• Find public information. While a company's application may look good on paper, news outlets and social media channels may say otherwise. Rather than relying solely on information supplied by the prospect, have employees scour the news and social media platforms to see if a business really is performing well and will be able to pay what it owes. Look over any recent reports to determine if a firm is in good fiscal health.

• Take responsiveness into account. If a business requesting credit isn't responsive to emails or phone calls, continually delays meetings or doesn't send over the necessary documents in a timely fashion, it may not be an ideal partner. A firm that is difficult to contact when it's still in the credit application stages could be impossible to reach if its account goes unpaid for a period.

• Note the firm's willingness to accept payment requirements. A firm's credit application and references may be ideal, but they aren't the only factors for a business extending credit to pay close attention to. When outlining terms of payment, late fees and credit requirements, it's important for business leaders to note how a prospect reacts. If a potential client is unwilling to accept these requirements and keeps asking for more lenient terms, it could be a sign they may be unable to pay when bills are sent.

• Gauge willingness to earn credit. Even if a company's application and credit history are ideal and it has remained responsive throughout the process, some business professionals may feel hesitant to extend credit to a new client while the future of the economy is still so precarious. Asking for an upfront payment or deposit on an initial product or service can be a way to test the firm's ability to pay and their interest in building a successful long-term relationship with your business. If a company refuses to comply, it could be taken as a sign they are unable to put down such an amount, which can raise a red flag.