Customer Credit Checks: Everything You Need to Know

Whether you sell to consumers or businesses, your company's cash flow depends on how quickly your clients pay you. 

Customers defaulting on your invoices can have a severe financial impact on your finances, and could leave you unable to operate as usual. 

Customer credit checks are needed to protect your business and ensure that any credit risks are firmly on your radar.

In this guide, we’ll provide all the information you need to understand company credit checks and explain how you can assess your customers’ creditworthiness.

What Is Customer Credit Reporting? 

Most people have a basic knowledge of credit reporting for individuals, but business credit ratings are less widely understood. 

Business credit scores and reports can be used to determine an organisation's relative creditworthiness. 

Credit reports and scores are made up of various factors that can help you understand the financial status of a company and identify whether it poses a credit risk to its customers, suppliers, and partners.

A business's credit rating is usually influenced by its accounts, balance sheet, cash flow, and registered debts, including any County Court Judgments (CCJs). 

Why Is It Important to Check a Client's Credit Score?

Customer credit score checking can help businesses to make more accurate and informed decisions. For one thing, it can give you a better idea of whether your customer is likely to default on their payments, leaving your own firm with cash flow issues.

The information gleaned from a customer’s credit report can also be used to inform your sales strategy, helping you to only approach potential clients who have the financial wherewithal to pay you. 

Similarly, credit reports could guide the formation of your contracts and payment terms to ensure that you can maintain a healthy financial relationship with the businesses you supply. 

Registered banks and credit providers review all of this information when deciding whether to approve a business for finance products, so it makes good sense for suppliers and commercial partners to conduct the same level of due diligence. 

How to Conduct a Customer Credit Check

Credit checking can provide you with essential information about the financial behaviour of a prospective customer. There are a variety of ways to go about assessing an organisation's credit record and payment history. 

Review Credit Reports

A business’ credit report can help you determine how likely a client is to pay your invoices. There are many commercial credit reference agencies that are regulated by the Financial Conduct Authority (FCA) and each has its own method for deciding a business's credit score.  

A firm's credit report can help you to determine whether they typically pay their bills on time and whether they have struggled to manage the credit available to them in the past. This is why a credit check is so helpful—they can tell you a lot about how a company manages its money. 

Notably, some firms also consider the personal credit histories of company directors and senior management officers. The right reporting solution can help you to understand their business’s credit score credentials and how the companies they are involved with have performed in the past.

 Review Their Published Accounts

Most companies are required to publish some form of accounts via the UK's Companies House service. The information contained within these documents can help you see whether they have the capital and sustained income to pay for the goods or services you provide. 

You may also wish to monitor whether a business files its annual accounts on time each year. Changing or delaying the accounting period could indicate that something is amiss and should prompt further investigation.

Do Your Research

Not everything pertinent to a firm's financial status is recorded in its credit report or within the pages of its annual accounts.

It's usually helpful to conduct your own risk checks by searching for negative media stories that indicate a business is in trouble. 

There's no guarantee that you'll find anything, but it's worth checking to see whether a company is embroiled in litigation or if it has a poor reputation on the market.

Request Bank References

You can tell a lot about a business by the state of its bank accounts. Asking a potential customer to provide banking references could help you get a general idea of how risky major authorised and regulated financial institutions perceive them to be.

This information can help to inform your risk strategy but doesn't necessarily present the complete picture. It should be coupled with other information to gain a thorough understanding of a business's status. 

Request Supplier References

Your customer's existing partners and suppliers are some of the best people to ask about how they handle their finances and business relationships.

This makes it much easier to establish a healthy working relationship. Multiple supplier references can give you a well-rounded view of whether a client poses a credit risk, but keep in mind that their credit report behaviour won't necessarily translate across to your business dealings.

Track Their Payment History

A company's credit report will usually contain details of how they've handled finance products in the past. This means that you'll be able to gauge whether they generally pay what they owe on time and in full.

A few late payments will not necessarily indicate that a firm is financially unsound. Still, it may be that you wish to amend your payment terms to safeguard your cash flow and prevent any issues arising in the future. 

Red Flag Alert's Credit Check Service

There are many ways to conduct a business credit check, but most of the steps described in this article are time-intensive manual exercises. 

Red Flag Alert makes the process easy by providing simple at-a-glance indications of the credit risk companies pose.

Our system contains data on every UK and international company. We analyse and report on the same metrics as traditional credit reference agencies, but we also incorporate a vast body of other data to provide a more holistic picture of how a business is performing, and score companies based on their predicted risk. 

This includes information like the number of CCJs a company has against it, the date of its latest accounts and the directors’ other business interests.

 Our users benefit from: 

• Access to our system's industry-leading financial health ratings for over 13 million businesses
• Over 100,000 updates per day and 50 new companies per month
• The ability to monitor the financial health of new and existing customers
• A more complete picture of financial health than any standard credit reports
• The ability to download credit reports in a variety of formats 
• The ability to filter sales prospects by credit status, making it easier to find customers in good financial shape
• Instant access through your CRM using our API

Our credit checks support a range of use cases, including:

Credit Control

Assess your customer’s risk level during onboarding. This is useful for businesses like energy brokers and insurance brokers who deal with a high volume of new clients.

Due Diligence

Regulated sectors require businesses to conduct more detailed due diligence than usual. Red Flag Alert’s data allows you to conduct detailed financial analysis and create a record of your decision.  

Monitor Customers and Suppliers

Our business monitoring tool informs you as soon as clients and suppliers become distressed, allowing you to take relevant action.

More Than Just a Credit Checking Tool

Red Flag Alert’s data allows us to provide a range of other services that go beyond company credit checks.  

These include providing sales and marketing teams with B2B lead generation tools and data, providing a range of AML and compliance services and helping local authorities use data to better understand their economies.

Red Flag Alert is the UK's most comprehensive credit control management tool. To discover how your business could benefit from Red Flag Alert's rich data set to reduce risk and for enhanced decision making, request a free trial.