Before you sign contracts with your customers, you need to know more about their financial status. Know your customers’ creditworthiness to ensure that you pick the right clients who will pay you on time. Late payments on the part of clients can delay the start of projects or the purchase of machinery for your business. It can even delay the payment of staff salaries. These are valid reasons why you should consider your customer’s creditworthiness. Continue reading below for more reasons why knowing the creditworthiness of your customers is important.
1. To see if they can do their part
It is common for businesses to sell on credit to their customers. If you have customers who will be getting your products or services on credit, you need to be sure that they can fulfill their responsibility. The best way to know is to conduct a credit check. You will know their financial standing through this check. You will also know how much they can afford to pay. This will help you to know the worth of service or product to offer on credit.
2. To plan accordingly
If you knew that your customers are fond of making late payments, will you rely on their payments to pay your employees? That will be like planning for disappointments. Conducting a credit check will help you to know the customer you are dealing with. Their credit history will tell you if they make payments on time. You can estimate when they will pay you back. At least, you will not rely on cash that will not be paid anytime soon. Disappointments in businesses can cost you a lot. However, if you know the customer’s attitude towards payments, you are rarely disappointed.
3. To avoid risky situations
Is your customer financially fit to take any form of credit? What if they are going bankrupt? This is exactly why you need to check their finances. When people go bankrupt, you may not be able to recover the money they owe you. It is, therefore, ideal to avoid that situation altogether. A credit check can help you avoid customers that are likely to go bankrupt or file for bankruptcy.
4. To know the customers you are dealing with
In some cases, you may not need to offer your products on credit to your customer, but the trade involves huge amount of money. If these customers are your dominant sources of patronage, you should probably look into their financial standing. You need to know if they can afford to make those huge payments for the period stipulated in the contract. You will not want to be taken by surprise when your customer is suddenly unable to buy your products the way you expect them to.
With creditworthiness, nothing is stable or constant over a long period. Customers with bad credit scores may repair their credits over time. In the same way, some customers with good credit scores may have their scores going bad. This is why you cannot rely on a very old credit report to inform your decisions on an important business deal. If the deal involves a huge financial investment, you should check the customer’s credit again if you did it a couple of years ago.
The good thing is that it is not difficult to check the creditworthiness of your customers. You can start with a credit application. You can also collect their credit reports and check their credit references. Another action you can take is to request for your customers’ financial statements. If your customer is a publicly traded company, public information can also give you more insight into their financial standing. When you are certain about their financial status, you can confidently do business with them. This will also go a long way to improve your business.