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How to Determine The Creditworthiness of a Business

Topics: Finance, Credit & Payments, Management

A 2019 study conducted by the Atradius Group, a leading insurance company, found that 55% of US B2B sales were transacted on credit. The study also found that 43% of the B2B sales on credit were overdue. As a consequence of late payments, 47% of the total value of all North American B2B credit sales were affected, and 6% of invoices were written off by USMCA businesses as uncollectable.

This means that your trade credit stability is tied to the creditworthiness of your worst customer.

That's why it's important to have a reliable credit system that has the ability to track the creditworthiness of your worst customer like a moving target. It’s also a good idea to have detailed KYC (Know Your Customer) procedures in place, and look into trade credit insurance for your business through a company like Allianz Trade.

How to Determine The Creditworthiness of a Customer

A creditworthy customer is one that can afford to pay for your product or service.  You want to you can extend as much credit to your customer as they can afford. The challenge is figuring out how much they can afford. 

Here are 4 ways to determine the creditworthiness of your customer:

1. Run a credit report

You can use any of the major credit reporting agencies like TransUnion, Experian, or Equifax. Dun & Bradstreet (D&B) focuses exclusively on business credit. D&B looks at B2B data from suppliers, public records, and historical and industry data to provide predictive and performance-based credit scores. That said, there is a cost to these reports, and not all credit information is correct.

Open banking is also a growing and accepted method of checking the creditworthiness of customers.  With open banking, large enterprises can easily access data from a combination of sources to determine the creditworthiness of their small business customers.

2. Obtain accounts receivable aging reports 

If you have one or two major clients you may want to take your credit policy to a more granular level, especially if you have an exclusive relationship with the company. Accounts receivable aging reports can also be purchased from third-party sources. 

3. Check references

Ask for references and check them. Bank references are also common. For a fee, you can find out the length of time a company has been with a bank and what the revolving line of credit is. Another option is to look for client testimonials on the company's website and call the accounting department of the client to see if they'll provide a reference. 

4. Conduct a gut check using creative investigative methods


Gut instinct and intuition are critical tools for business success. Not only are they free of charge, but they can often be supported by creative investigative methods. Ask yourself

  • Is your customer answering the phone? 
  • Are they responsive to emails?
  • Is their website up-to-date and professional? 

If the answer is no, they may also be slow to pay bills. 

In an INC article, Scott Gerber, the founder of SizzleIt, told the author that he won’t take on a client if there are errors on their website. Another business owner from the same article uses Google’s “Streetview” map to verify business locations.

determining your creditworthiness

Know Your Customer: Check Customer Creditworthiness

Credit is not a recent development.  Credit has been around since there was a lack of a “ready coin."  

In the 1800s, credit was largely a social activity. A credit check consisted of asking someone in your circle about someone in their circle. In a small community formal credit checks may be unnecessary,  but in a global economy knowing how to determine the creditworthiness of your customer is a required process.

It is not enough to simply have a process, the process must be reliable. A reliable process to determine the creditworthiness of your customer can be a springboard to growth;  an unreliable process can also be a springboard to failure.

One way to get on the right springboard is to do a better job of determining the creditworthiness of your customer before the extension of credit occurs. Investing in a more reliable system has the potential to yield a significant ROI that can be measured with faster-paying customers,  higher net income, and more reliable cash flows. The investment is well worth the effort, especially if a large portion of your company's cash flows are being used to finance accounts receivable.

Looking for a way to automate your B2B company's credit management and simplify the credit check or KYC process? Apruve can help. With Apruve you can easily extend risk-free credit to your customers worldwide, and get paid within days. Learn more about Apruve's credit network or contact Apruve’s specialists to sign up for a demo today!

Net terms accounts receivable


ABOUT APRUVE

Apruve enables large enterprises to automate long-tail credit and A/R so you can stop spending 80% of your time and resources on 20% of your revenue. We partner with each of our customers to solve their unique credit, payment, and accounts receivable challenges and build the right credit solutions for your markets, customers, and goals. 

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