Credit where it's due
Nov 25 2005
Small businesses should check potential customers’ creditworthiness before starting to trade with them and monitor them thereafter to avoid payment problems developing, advises the Better Payment Practice Group (BPPG).
The main way of doing this is to apply for a status report on the customer from a credit agency. These include full customer details and financial results along with the payment experience of other suppliers, county court judgments registered against them and a recommended credit rating.
It would be inefficient to run credit checks on all your customers so concentrate on those that bring in most sales. The 80/20 rule is useful, identifying the few accounts comprising most of your sales. List them in descending order by value until they add up to 80 per cent of total sales then give them a full credit check and conduct briefer checks on others. Always check customers by size of debt, not alphabetical order, so you never suffer a large bad debt through lack of time.
’Offering trade credit should be a carefully thought out business decision. It is not an automatic right,’ explains Stephen Lewis, member of the BPPG representing the Credit Services Association ‘Obtaining a status report from a credit agency is one way of checking creditworthiness and if the potential customer has a poor credit rating, this should be a strong warning not to extend credit.
‘Businesses can improve their credit rating, and their access to trade credit, by paying on time, keeping listings in information directories up to date and, for limited companies, ensuring that company registration details are accurate and that returns and accounts are filed on time,’ he concludes.
The BPPG has added a new section to its website to help companies understand business credit ratings. Full information on understanding business credit ratings can be found at http://www.payontime.co.uk/collect/collect_understand_ratings.html.