Customers and clients seem to expect to be granted credit as a matter of course. But as a small business owner, you can’t afford to extend credit to everyone so it is vital that you perform customer credit checks to reduce your risk. After all, if he or she doesn’t pay, you’re the one that’s out of pocket.
The Problem With Not Doing Credit Checks
According to Dunn & Bradstreet, credit fraud costs businesses billions of dollars per year. Small businesses can be particularly vulnerable – a sale of an expensive piece of equipment or weeks or months of services provided to a customer who is then unable to pay can be financially devastating to a small business owner. Contractors and small businesses are often unaware that their clients are in financial difficulty until they find out that the client has gone bankrupt.
Many small business owners operate on faith, as it were, doing a credit check by asking the customer for references. This is a fine system in an ideal world where everyone is honest. If we lived there, we wouldn’t have to run credit checks in the first place.
The problem with using references as credit checks is that customers with blemished credit records are familiar with the process and of course have carefully selected their references so that you get only the polished version of their credit history when you inquire.
If you’re concerned about extending credit to a customer or company, invest in a credit report. A credit report will give you the information you need to make a decision about whether or not to extend credit.
A credit report will include a customer’s historical payment data, bankruptcy records, any lawsuits, liens and court judgments against a company, and a risk rating that predicts how likely bill payment is – all the information you need to make an intelligent decision about whether or not to extend credit.
Get Permission From the Customer Before Running a Personal Credit Check
By law you need to obtain permission in writing from the customer before performing a personal credit check. A customer that refuses to grant permission is most likely a poor credit risk.
Business vs Personal Credit
Business credit is different from personal credit, so if your customer is another business you will need a business credit report rather than a personal one unless the customer is a sole proprietor. Unlike personal credit, business credit information is public and can be obtained for a fee from a credit bureau.
What Information Is Provided in a Credit Report?
- Identifying information – in a personal report this includes the name, address, social security number, date of birth, employer, etc. A business credit report uses the IRS employer id number for identification.
- Credit accounts – bank cards, auto loans, mortgages. Includes credit limits, outstanding balances, payment histories, etc.
- Credit Rating and Credit Score with up to 5 credit score factors.
- Public records on overdue debts, including bankruptcies, foreclosures, suits, liens, etc. from collection agencies and state/provincial/municipal courts
- Credit Inquiries ( past 2 years ) from lenders, credit card applications and personal loans
How to Get a Credit Report in the U.S. and Canada
How do you get a credit report on a particular customer? In the U.S. and Canada, you use a credit bureau, an independent agency that provides information on an individual’s or company’s credit history. There are many credit bureaus, the largest being Dun & Bradstreet, Equifax, Experian, and TransUnion.
Fees vary widely depending on the information required – a business credit report can include extras such as Credit Risk Scores and Business Failure Risk Scores. Related products such as fraud prevention tools are also typically offered by the major bureaus.
In most cases, you need to become a member of a particular credit bureau before you can access their services because credit reports on other people or businesses are not available to just anyone.
Once you’ve become a member or subscriber of the bureau, you’ll be able to access credit reports online, although you can also have them sent to you via mail or fax if you prefer.
Are Credit Reports Always Accurate?
Unfortunately, credit reports are not guaranteed to be absolutely correct – there are hundreds of millions of reported entries and mistakes are common – some experts estimate that there are errors in 10 to 33 per cent of credit files.
Refusing Credit to a Customer
If a credit check comes back negative you should send a polite note to the customer informing them that you cannot extend credit at this time. This should be done as tactfully as possible to avoid offense. The note should state why the request for credit has been denied, thank the customer, and offer solutions such as cash payments.
Make Credit Checks a Habit
Accepting only the amount of risk you’re comfortable with is a good way to go through life. Using credit reports to do credit checks on customers can be a good investment both in terms of your finances and your peace of mind.