A conversation with a potential customer may feel positive, but it's unwise to make decisions based solely on a gut feeling. Who or what organization are you getting involved with? Is the customer creditworthy? It's a waste of time, energy, and risky to engage with a customer who may turn out to be non-creditworthy. A credit check can provide a solution in such situations.
What is a credit check?
A credit check allows you to assess the creditworthiness of a company, reducing the risk of unpaid invoices. This is particularly crucial for businesses that invoice after delivery, ensuring effective debtor management.
Why conduct a credit check?
When operating on an invoice basis, there is inherent risk for you as a supplier or service provider. It is not uncommon to have to finance certain expenses at the start of a collaboration, such as materials or products. For service providers, this may include personnel costs. While there is nothing inherently wrong with this, problems arise when it turns out that the new customer is not creditworthy and cannot pay the invoice. This can have significant negative consequences for the continuity of your business. Therefore, it is wise to assess the creditworthiness of new customers in advance. If a new customer has sufficient credit, doing business becomes much less risky for you.
What is checked in a credit check?
When conducting a credit check on a company, you are naturally interested in the aspects and information that are assessed. In other words, how is the company's risk profile determined? Specific evaluation points may vary among credit management companies, but typically include the following:
- Financial data: Thorough analysis of the company's financial data, including annual statements, balance sheets, income statements, and cash flow statements. Important financial ratios and indicators are calculated and evaluated to gain insights into the company's financial stability, liquidity, and profitability.
- Credit history: Assessment of the company's credit history, including payment experiences with current and previous creditors, business partners, and suppliers. Any payment delays, defaults, bankruptcies, or other negative information can influence the creditworthiness.
- Company information: Gathering and verification of essential company information such as legal form, establishment date, business activities, locations, ownership structure, number of employees, and any branch offices. This information provides an overview of the company's business activity and stability.
- Directors and owners: Background and credit history of the company's directors and owners may also be checked. This includes their personal financial situation, previous bankruptcies, payment delays, or other negative credit information that could impact the company.
- Industry analysis: An analysis may be conducted on the industry in which the company operates, understanding market conditions, competitive position, and growth prospects. This can assist in assessing the risk and creditworthiness of the company compared to other players in the sector.
- Public registers: Various public registers are consulted to obtain additional information, such as bankruptcy registers, Chamber of Commerce registrations, ownership information, and any legal proceedings involving the company.
- The purpose of a credit check is to obtain a holistic view of a company's financial health, payment capacity, and the risk of default. Based on this information, a creditor can determine the company's creditworthiness and the associated risk level of extending credit or doing business with them.
Credit checking provides a solution for assessing the creditworthiness of companies
Credit checking safeguards businesses against damage caused by unpaid invoices. When you provide a service, you expect to be paid, assuming the invoice is legitimate. Credit checking allows you to assess the creditworthiness of your business relationships in advance. Contact us to explore how we can facilitate secure and straightforward business transactions for you.