Credit Applications

Why Business Credit Checks Are important

Tim Demetriou

Author

July 13, 2022

Published

The Importance of Business Credit Checks

Offering credit to your customers can be a double-edged sword.

Because many businesses like the flexibility of being able to pay for purchases over time, offering credit can help you gain more customers, but it can also increase your risk of not being paid. 

To minimise your risk, it’s important to conduct business credit checks before extending credit.

Here are a few things you should know about conducting these credit checks to protect your own business cash flow.

Why You Should Do Business Credit Checks

If you extend credit to a customer who has a bad credit history, the likelihood of them defaulting on the debt is higher than it is for someone with a good credit history.

If you don’t ever conduct a credit check, you won’t be able to tell which customers are a higher risk than others.

Keep in mind that just because a customer has bad credit doesn’t mean you have to end the relationship.

It simply means you may have to offer them an alternative payment strategy that doesn’t involve extending credit. You have to protect yourself, and your customer should understand that.

How To Get the Credit Report

Before you can conduct business credit checks, you first need to get authorisation from the business owner.

One way to get this permission is by having the customer fill out a credit application.

Usually, a credit application includes the following:

  • Name of business and business owner(s)
  • Number of years in business
  • Business structure
  • Taxpayer ID number
  • Bank references
  • Trade references
  • Contact information
  • Amount of requested credit
  • Authorisation to pull a credit report

After a customer has filled out a credit application and given you authorisation to access their credit history, you can contact a credit agency to get the report.

PencilPay is a user-friendly digital platform that can quickly provide you with access to a buyer’s credit score. It can also help you collect payment on any invoice that is overdue.

Decide Whether To Offer Credit

Once you have done business credit checks, you’ll need to decide whether to offer credit to the customer in question.

This can be a complicated decision, especially if you aren’t familiar with analysing credit profiles and scores.

Fortunately, you can rely on PencilPay to help you assess a buyer’s credit score so you can determine whether that buyer is too risky to extend credit to.

Once you have made a decision, advise your customer of your decision and let them know in writing whether you have accepted or rejected their application and why.

If you approve the customer, include the following information in the approval letter:

  • Credit terms and default or penalty terms
  • Credit limit
  • All other applicable terms and conditions

When you extend credit, it is important to send invoices to your customers regularly.

PencilPay can help you keep track of your unpaid invoices and any overdue payments so you can take appropriate action.


Make Your Business Credit Checks Easier

It takes time and effort to perform business credit checks when making credit decisions.

PencilPay can help you save time by automating many of your trading terms processes.

To learn more about how this platform can help your small business, contact us today.