<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=833488257027405&amp;ev=PageView&amp;noscript=1">

What You Don't Know About Automating A/R Financing May Blow You Away

Posted by Michael Noble - 11 April, 2022

How to Determine The Creditworthiness of a Customer

A 2016 study conducted by the Atradius Group found that 43% of US B2B  sales were transacted on credit. The study also found that 47% of the  B2B sales on credit were late. As a consequence of late payments, 39% of those surveyed reported having to pay their own suppliers  late. In other words,  your credit is tied to the creditworthiness of your worst customer because failures in trade credit can have a ripple effect on the entire industry. In such a situation, 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. You need to get ahead of the ripple effect before it hits you.

Developing A Better Way To Determine The Creditworthiness Of Your Customer

First, let's define creditworthy. A customer who can afford to pay for your product is creditworthy. In a perfect world 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, 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.

  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. Is your customer answering the phone? Are they responsive to emails? Is their website 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 location. 

determining your creditworthiness

Know Your Customer: Get On The Right Springboard

"'Tis what I want, and 'tis a pen'orth too;
In many years I will not trouble you."
If you complain you have no ready coin,-
No matter, 'tis but writing of a line;
A little bill, not to be paid at sight:
        -The Works of John Dryden in Verse and Prose, Volume 1

Credit is not a recent development. As the bit of 18th-century poetry above suggests, credit has been around since there was a lack of “ready coin”.   In the 1800's, 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, but 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.

Net terms accounts receivable

Topics: Finance, Credit, Management


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. 

New call-to-action