Credit Policy

Before extending credit to a new customer, check its credit history. The process is simple and along with a sound credit policy, this simple step will protect your business from bad payers or potentially fraudulent customers.

Before discussing the process of obtaining credit information on your customers, let’s discuss the fundamentals of developing a sound credit policy. First, and perhaps most difficult, is to limit your credit exposure to any single customer to a limit that, if uncollectible, will not have catastrophic financial consequences. Easier said than done, especially if you are new in business and you’re trying to establish credit for your first customer. As a general rule of thumb, the smaller YOUR business, the less you can afford to lose. That’s why start-up business have to exercise extreme caution or get expert outside help to assist you in making credit decisions. More on that later.

The second element of a sound small business is to be careful; however, not to rely 100% on information submitted by your customer. Don’t rely 100% on references provided by your customers. A credit application will also contain a space for your customer to provide a bank and perhaps a landlord reference. Both should be checked carefully.

Your credit policy may require your prospective customer to meet certain hurdles in terms of cash on hand in bank accounts or three positive credit references, and a bank reference. Some credit policies require that if the amount of credit requested exceeds a certain amount, a Dun & Bradstreet (“D & B”) report is required. D & B is a company that collects millions of pieces of credit data on millions of companies and sells that date in the form of credit reports to its subscribers. There are other providers of commercial credit reports for your small business as well, including Hoover’s.

Commercial credit reports are often more powerful predictors of your prospective customers’ ability to pay their invoices. The companies scour public records for such things as tax liens, UCC filings, bank liens, judgments, years in business, bankruptcy filings, and other information available in public records.

Another thing that you can do to check if your customer is creditworthy is to check publicly available information. For example, the company’s social media activity and website. Often, you will be surprised by the information you find when searching a company name on the internet. Publicly listed companies are required by law to file quarterly and annual reports with the Securities and Exchange Commission (“SEC”), which are available for inspection online on the company’s website or financial services’ websites. Most public companies have a navigation tool for “investor relations” where you will find SEC filings and in many cases, annual reports containing the company’s audited financial statements.

What if financial statement analysis and credit underwriting is not your strength?

Factoring accounts receivable is a reliable method of converting your invoices into immediate cash, providing an immediate source of liquidity and cash flow when you deliver goods or services to your customer. Companies that provide this service are called factoring companies. A factoring company advances you funds against eligible invoices and conducts its own due diligence on your customers to protect you and them from predictable credit losses. Full-service factoring companies not only speed up your cash flow by advancing funds against your invoices, but some of them do the billing (invoicing) for you, and collect payments on your behalf.

How to check your credit score?

From time to time, you may want to check your own credit score. Just as you are checking out the creditworthiness of your customers, your suppliers will also be researching how liquid your business is when determining whether they will extend a line of credit to you. What will they find online and will it harm your credit rating if you do your own research?

The best place to check a credit score is online. Thanks to numerous credit union sites and other platforms, you can check your credit score for free online.

Is it bad to check your credit score?

There is a difference between a ‘soft’ credit inquiry and a ‘hard’ credit inquiry. If you check your own credit score, it is seen as a ‘soft’ credit inquiry and this will not damage your credit score. If a loan provider or a bank checks your credit score, it is seen as ‘hard’ inquiry and it may damage your credit score.

What is the best way to check credit score?

Here are the best routes to take if you want to check your credit score:

  1. Browse free credit checking websites online: There are many websites that will show you your credit score for free. This is a ‘soft’ inquiry and it won’t damage your credit score. Beware of websites that offer a free service but then ask you to pay money after you have submitted your personal details.
  2. Join a credit checking website. If you register an account on a free credit checking website, you will be able to return to the site and check your credit score in future. Some of the personal information you will have to provide include your email address, full name, the last four digits of your Social Security Number, mailing address and your date of birth. In addition to receiving your credit score (which is between 300 – 850), you will also be presented with a list of your total debt.

What is a soft credit check and what does it show?

A soft credit check refers to a credit check that is done by an individual or a company as a background check. It is different to a hard credit check because this type of check isn’t damaging to your credit score. A soft credit check is done to check a person’s credit worthiness and not necessarily to immediately approve a loan to the person.

A soft credit check gives you a holistic view of a person’s credit worthiness. It is also known as a ‘quotation search’ and it is done to establish whether a person is likely to be able to repay a loan or adhere to loan agreement terms.

What should your credit score be?

A credit score is a three digit number between 300 and 850. Generally, a credit score above 700 is considered to be a good credit score rating and a score above 800 is deemed excellent. The majority of people have a credit score between 600 and 700.

How can you raise your credit score?

Repairing a bad credit score can take time. There are no overnight fixes and you will have to continue to manage your spending, repayments and your credit over time in order to make a change to your credit score. Here are a few things that you can do to improve your credit score:

  • Start reducing your debt: This can seem like a tall order if you have a lot of debt, but you have to start somewhere. Start by cutting up a credit card that you have deciding to pay off. Make a list of all your credit cards and loans, then choose your loans with the highest interest rates to pay off first. Work with a debt relief company to set up a payment plan that works for you.
  • Set up automatic payments or payment reminders: One of the biggest contributing factors to a poor credit score is late payments. Many online bank portals offer the ability to set up payment reminders or even automatic payments so that you don’t risk forgetting about payments and being penalized for late payments. Set up text message and email alerts if you are prone to forgetting about payments that you need to make.
  • Get current and stay current: If you have missed a few payments on an account, then get up to date and make sure that you stay up to date. If you have paid off a loan, the loan will still reflect for seven years.
  • The amount you owe matters: High outstanding amounts on revolving credit and credit cards can also affect your credit score, so try to keep the balances you owe low if you can.
  • Don’t open and close credit cards: Many people make the mistake of opening a credit card that they don’t intend to use simply to increase their available credit. This isn’t a good strategy and the opposite (to close unused credit cards to raise your score) isn’t a good option either. Both strategies are short-term and won’t increase your credit score in the long run. The only way to positively impact your credit score in the long run is to manage your credit cards and repayments responsibly over time.

With factoring, you don’t have to worry about your credit history. What makes factoring different to traditional banks and other alternative lending institutions is that you don’t have to look for a company that offers small business loans with no credit checks. Instead of getting an unsecured loan or a short term loan, you can receive cash upfront for your outstanding invoices.

Find out more about working capital solutions from our trusted factoring experts today.