Why Credit Checking New Customers is Paramount
As a business owner, it’s important to make sure that your business has the foundations to grow and be profitable. Not only this, it is also important to make sure that you have specific provisions in place to safeguard your operations to facilitate this grow and success.
If your business operates on the basis of providing products or services and receives payment at a later date, you are effectively extending a line of credit – loaning money to your customers. This is essentially why you need to conduct your own due diligence and understand who you are dealing with and what their financial status and or capacity to pay their liabilities. Similar to financial institutions, they conduct a review of your financial status prior to approving a loan to understand your serviceability of that loan, so why should you be any different?
A credit check on your customers (especially new customers) is an excellent way to provide a level of guarantee that your customers can actually afford to pay the invoices that you issue them. Credit checks provide key information about a particular business or an individual’s financial history – good and bad, thanks to the introduction of the Comprehensive Credit Reporting (CCR) in Australia.
Depending on your unique situation, there’s many ways you can learn the credit history of new customers to protect your business against bad debt, however before we outline the most reliable ways to acquire this information, we explain what Comprehensive Credit Reporting (CCR) is, and what this now means for business owners such as yourself in safeguarding your business interests.
What is Comprehensive Credit Reporting (CCR)?
Essentially, Comprehensive Credit Reporting (CCR) or ‘positive reporting’ refers to additional information being provided to, and held by, Credit Reporting Bodies (CRBs) in Australia. These changes permit licensed credit providers access and use comprehensive information in order to make more educated lending decisions. This information now includes both positive and negative data on a person or business, rather previously credit providers only had access to negative credit events in which they assessed the viability for approval.
Initially launched in March 2014, the changes to the Privacy Act 1988 came into effect to allow additional information to be included in your credit history in your credit file. With the on boarding originally optional for financial providers, the government announced in late 2017 that is was now mandatory due to the slow adoption. Now, the requirement is that all licensed credit providers must have at least 50% of their positive consumer credit data ‘ready for reporting’ by the 1st July 2018, with all credit data available in 2019.
So what has Comprehensive Credit Reporting (CCR) changed?
The new data incorporated in your credit file under Comprehensive Credit Reporting includes repayment history and consumer credit liability information.
Repayment history information includes:
- Repayment history for credit accounts. For example; home and personal loans, credit cards.
- General payment history like whether you have made a payment altogether or if you have met the minimum payment required by your financial institution.
- Whether you’re have missed payments or if repayments have been made.
Licensed credit providers in Australia can only record your repayment history, of which can only be stored for two (2) years. Please note that Utility and Telecommunication companies are not licensed credit providers, thus your repayment history wouldn’t include these providers.
Consumer credit liability information includes:
- The type of credit accounts that belong to you.
- Dates of which the respective credit account(s) were opened/ closed.
- Name of credit institution
- Credit account limit(s)
So now you know what CCR is and its implications. Let’s look at the most cost efficient and effective ways to learn your customer’s credit history to reduce your chances of bad debt.
With the introduction of Comprehensive Credit Reporting (CCR) and the growing number of credit report providers, it’s now easier than ever to acquire a credit report on prospective customers. These reports can provide vital information that can be the difference between business success and serious disputes – with the possibility of having to take legal action which involves additional costs.
Report contain information such as:
- Records of bankruptcy (if applicable)
- Previous payment data
- Any running legal processes against a company
- A risk rating that tells you how likely it is for a customer to be able to pay their bills as and when they fall due.
Summarily, the benefits that you get from these credit checks are:
- Provision of valuable information about the payment habits of your existing or prospective customers
- Qualification of any new sales opportunities
- Detailed assessment of the risk levels of granting credit to a customer.
A customer does not have to be a business, it could also be an individual. So depending on the situation, you are now more than ever able to understand who you are dealing with to make sure your implementing and agreeing to the most appropriate terms for the benefit of your business or personal circumstances.
Prior to negotiating trading terms with new customers, it might be beneficial to review and contact their credit references (if available) to get first-hand feedback from others who have conducted business with them in the past. Although obviously not as reliable as a credit report, it can provide you with another perspective to help define your trading agreement.
To make sure the relationship kicks off positively, it’s always good to disclose and be transparent in regards to your process in conducting a thorough background check. A good customer wouldn’t have any issues with this and would respect the process, but it’s also a good strategy to assess their reaction to this to see if they have any reservations to conducting a background check.
If you’re looking to conduct business with a new customer that is a large publicly listed company, you’re able to acquire their financial statements quite easily as they are available to the public for free. Whilst financial statements will provide their financial status as an operating company, what these statements don’t disclose is their payment history and how well they meet their financial obligations to smaller companies.
As outlined in another article called Late payments creates cash flow stress on Australian small business, research from Cloud Accounting Software, Xero identify large companies having a history of setting unreasonable trading terms on smaller businesses, so it’s imperative you not only conduct a review of their credit and payment history, but also try and negotiate suitable trading terms that aids your businesses cash flow.
Taking out credit insurance is another effective way to reduce your risk against bad debt. Credit insurance covers you for all outstanding money owed to you by customers – whether they simply don’t pay, go bankrupt or into liquidation, so by having an insurance policy will safeguard your businesses cash flow and you can remain operating as normal.
Although we have outlined some key ways to learn more about potential new customers to protect your business and minimize risk, here’s 3 more tips to help avoid bad debt.
Whilst understanding a new customer’s credit history is great, you also might like to see how long they have been in business for, as offering credit to new customers holds a degree of risk – especially as a small-medium sized business.
- Understand their business to identify their commercial cycles (if any)
- Perhaps start off providing a small credit limit until they build up enough history with you prior to opening up a larger credit line.
- Continually monitor all of your customer’s payment patterns to help improve on existing processes.
- Keep up to date with industry and economic trends related to your customer’s business, as this could help foresee any potential payment issues in the future.
About Marshall Freeman
Marshall Freeman is Australia’s leading debt collection and recovery specialists. We have been servicing over 20,000 businesses throughout Australia for over 15 years, which has set the foundation of deploying industry leading knowledge and collection techniques that simply delivers results that are unrivalled. Whether you need assistance with slow payers or collection of bad debt, we offer a transparent and stress free collection process that makes your debt a priority to get you paid faster.
If you’re looking to partner with a result driven debt collection agency, please feel free to call us on 1300 136 271 or get an obligation FREE debt appraisal by filling in the form on this page.