Customer Creditworthiness and Affordability: 4 Pitfalls to Avoid

Onboarding a new customer can mean great things for your business.

But not every customer is always a dream come true. What if you extend credit to a new customer that seems like a dream true, only to realize down the road that they can’t or won’t pay your invoices on time? What if you start a business relationship with a supplier without doing the necessary due diligence and then find out they’ve been involved in fraud?

Customer creditworthiness and affordability aren’t something you can afford to get wrong. Learning how to spot and avoid a few key red flags when it comes to customer creditworthiness and affordability can go a long way.

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Chapter 1

1. Working with habitual late payers

Customer acquisition is such an important part of running and growing your business. But you need to think of customer acquisition you need to make sure that the system is working on both ends. For example, let’s say you own a manufacturing company that onboards a new customer placing a large order. You extend them credit and agree on terms of net 30. Your company may need to order materials to fulfil the order, but that cost will be factored into your profit when you’re paid back.

But what happens if you aren’t paid back? Let’s say that company misses their net 30 terms. At first, it may not be that big of a deal, but if it continues, it could create major problems for your business. Suddenly, it’s two months past those terms and you still haven’t seen a cent. You aren’t seeing a return on the investment you made to fulfil the order. Plus, if the product hasn’t been delivered to the customer yet, you could also creep into the red through warehousing, insurance and other storage expenses.

You might already know that we always recommend checking a company’s DBT when you pull a business credit report. DBT, or Days Beyond Terms, tells you the average number of days a company is paying their bills past payment terms. So, in our example about your manufacturing company, those late payers might have a DBT of 60 or more.

While it can be a bit of a misunderstood financial metric, DBT can give you a clear glimpse into a company’s overall financial health. Look for either of the following warning signs:

A high DBT. Simply put, the higher a company’s DBT, the less likely it is that you’ll be paid on time. If a company has a DBT of 90 or more, for example, you could expect to wait for months before you start to see payment.

A fluctuating DBT. Let’s say you check a customer’s DBT on their business credit report before deciding to extend them credit. You see that the numbers look pretty low – 2 one month, 10 the next, 5 the one after that – so you’re happy to go ahead. But think about the story that those numbers are telling. If a company’s DBT is fluctuating like that, they could be struggling to maintain their cashflow. Their financial future may be a bit too cloudy for you to be comfortable extending credit.

Chapter 1

2. Not checking for fraud violations before signing contracts

Protecting your business from fraud should be one of your top priorities as a business. You likely already have systems in place that help detect and prevent fraud risks when they arise. But are you doing enough to make sure you aren’t inviting fraud into your business?

Before you work with a new company, you should always closely check them for fraud and compliance violations. Even if there are no immediate red flags for fraud, a closer look could reveal problems. Using tools like Nuvo can help ensure that the companies legitimate and will not cause you problems in the long run.

Look at legal filings on their business credit reports. A large company having several legal filings against them for minor violations, for example, may not be an issue for you. If the filings are for larger crimes like fraud, however, you may want to think further about your decision to work with them.

If you miss out on catching a fraud risk, it could lead to major problems down the road. Let’s say you start working with a new customer who passes basic checks. Instead of digging any further, you carry on the relationship and extend them credit. If that business turns out to be fraudulent, you likely won’t see any return on the investment you put into them. That could hinder your own cash flow and mean you start having trouble fulfilling orders.

You should be continuously monitoring and screening your customers and business partners for fraud violations. If you end up working with a company in violation, it may not be so obvious as the example we just used. Instead, you could have a years-long relationship with a company that seems fine to you, but is actually violating several laws and regulations. From there, you could see major reputational damage. People want to avoid fraud at all costs; and that can include not working with companies who work with fraudulent companies.

Chapter 1

3. Using outdated or inaccurate data to assess creditworthiness

Did you know that b2b data can decay at a rate of up to 70% a year? When you use that data to make key business decisions and decide who your business should and shouldn’t work with, it needs to be up to date. Not only that, you need to be able to trust the information. You could do all the credit checks and due diligence processes possible, but if the information you’re basing them on is incorrect then your business is at risk. Our research study The Sales vs. Credit Control Battle found that only 31% of respondents rated their CRM data quality as “excellent.” And when your sales team doesn’t have reliable data, it’s easy to accidentally work with businesses that won’t quickly pay their bills.

Between bankruptcies, economic downturns and global affairs, a business’ standing can change in the blink of an eye. You need to be sure that your data source is being constantly updated and comes from reliable sources. Look for data that:

Comes from local sources, such as registries, publications and debt collectors

Is either owned by your data source or delivered to them by local partners

Is validated through techniques like data issue tracking, certification and statistic collection

You should also remember to consistently check your customers’ business credit reports. Our research study Feeling the Recession Pinch found that 26% of businesses rarely or never run credit checks on existing customers, with an additional 6% only doing it if a customer pays late. Staying on top of your customers’ credit reports means fewer surprises down the road and more accurate, up-to-date data.

Chapter 1

4. Manual credit checks causing bottlenecks

It can feel like an uphill climb when you’re trying to onboard a new customer. Your sales team spends a lot of time and effort to identify and convert new customers. The last thing you want to do is have that time be for nothing, but unfortunately, sometimes that’s exactly what happens.

In our research study The Sales vs. Credit Control Battle, we found that 54% of respondents said they waste up to 20 hours per week pursuing leads that don’t meet their company’s credit policy. That’s half of an entire work week amounting to nothing. Plus, after the sales team has done their part, manual credit checks by the finance team draw out the process even further. All of that without a sale? It can definitely start to feel frustrating.

It feels like everyone is talking about AI and automation right now, but there’s a very good reason for that: automation in your customer credit processes can be a game-changer. Being able to approve or deny credit in a few clicks rather than lengthy manual processes frees up hours of time in your team each week.

About the Author

Lina Chindamo, Director, Enterprise Accounts, Creditsafe

Lina Chindamo is a Certified Credit Professional (CCP) with over 25 years of experience in credit risk management. She has held senior leadership roles with leading companies in multiple industries in the Canadian market such as Sony Electronics, Maple Leaf Foods, and Mondelez Canada. Her experience as a credit professional along with her current role as Director, Enterprise Accounts who works closely with c-suite partners and credit teams across all industries makes her a well-rounded credit professional who is well respected in our industry.

Customer Creditworthiness and Affordability: 4 Pitfalls to Avoid

Onboarding a new customer can mean great things for your business.

Get the full picture of your customers' finances

Enter a company name to view a free business credit report

1. Working with habitual late payers

2. Not checking for fraud violations before signing contracts

3. Using outdated or inaccurate data to assess creditworthiness

4. Manual credit checks causing bottlenecks

About the Author

How often do you check your customers' credit reports?

Enter a company name to view a free business credit report.

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