Credit Reports: It pays to know who you’re dealing with

Damien Stevens writes for Xero about the importance of credit reports & keeping your business financially safe ~ WizeOwl

Would you lend money to someone you don’t know? Of course not! Thing is, that’s potentially what you’re doing when you agree to 30 day payment terms.

While upfront payment is often not practical, a one-size-fits-all solution won’t work either. That’s why you can’t set the same payment terms for every business.

The best way to decide on those payment terms is to know as much as you can about your customer’s business before you get into a commercial agreement with them.

It’s helpful to know which customers you can trust and which are most likely to have trouble paying. Now there’s a way to know more about your customer to help protect your business.

How commercial credit checks help businesses

Big businesses have used commercial credit reports for a long time to determine how much credit to extend to a customer. And there’s a reason for this. Commercial credit reports provide valuable insights around payment history, defaults and other important information. This can help businesses make informed decisions to minimise potential financial and reputational risks. These commercial reports are now mainstream. This includes small businesses as they can provide insights around who you’re doing business with and include key information like:

  • A commercial score, indicating the likelihood of a business’ future risk of default or non-payment.
  • Prospective insights on how fast a business pays their invoices.
  • Details of the current directors and shareholders, registered address details and business information.
  • If available, information such as commercial defaults, court judgements and any negative financial history.

Information contained in commercial credit reports comes from multiple sources. It’s packaged to projects insights to make informed decisions.

Don’t fall victim to slow paying clients anymore

Commercial credit reports transform decisions, and put the power back in your hands to:

  • Pick your business clients carefully to reduce the threat of slow payment,
  • Negotiate better terms with bigger businesses,
  • Minimise any probable financial risk to your business,
  • Avoid those awkward payment conversations,
  • Get paid on time and
  • Survive and thrive.

Spot the warning signs quicker

Sometimes your cash flow problems are the result of more than the occasional late payment. The worst position to be in is when a customer doesn’t pay at all.

The reality is businesses don’t fail overnight, and when it starts experiencing financial trouble, one of the first things it will do is stop paying its suppliers.

Cash flow can make or break a business. If a company stops paying its suppliers, a ripple effect can begin, radiating out from the original insolvent business and damaging any unprepared company it comes into contact with.

Business owners should look for signs of financial distress so they’re not caught unaware. They also need to have proper processes in place to keep themselves safe.

Conducting a commercial credit check before taking on new customers, maintaining regular credit monitoring practices and registering interests and assets on the Personal Properties Securities Register (PPSR) can help businesses significantly minimise their losses in the event of customer insolvency.

If a company is showing signs of being at risk of insolvency, that doesn’t necessarily mean you should stop doing business with them – you just need to go into these relationships with your eyes open.

Don’t become your customer’s bank

If you’re unaware of a customer in financial distress, you may find yourself acting as their ‘bank’ until they can pay you what’s owed.

Stay on the front foot with your customer and check their commercial credit report. This allows you to ensure payment terms are still appropriate and protects your cash flow.

How to take the power back and get paid

Commercial credit reports are there to assist you to know who you’re doing business with. They give you powerful insights about your customer and empower you to make changes to your business relationships.

For example, if a commercial credit report shows a customer on average takes 60 days to pay their invoices on 45 day terms, you should consider changing your terms to 7 days, COD or request an upfront deposit.

It’s all about removing any surprises from operating your business so that your business can achieve a consistent cash flow.