If you knew a customer was about to go bust, would you allow 30 days credit? 

If you knew a customer paid others very late, would you expect payment on time? 

So it makes sense to find out. Credit managers know that sales are increased, not reduced, by checking credit worthiness because sales efforts can be intensified with sound customers and not wasted on a mass of unknown prospects. 

There are many competitors for your customers' funds and a supplier less tolerant than you may have started legal action or even winding-up proceedings. 

You need information to find out how others have fared recently. There are two powerful reasons for managing credit risk: 

Commercial: future sales are more reliable.

Financial: profit is increased by fewer bad debts and lower borrowings. 

How to check credit worthiness.

Which Accounts?
Credit costs time and resources. You can reduce the cost by getting small orders started quickly with a 'Fast Start Limit' for any new accounts with no checking. Of course there is a risk but £500, say, may not hurt if it is lost. However, further orders need proper checks.

Use the 80/20 rule to identify the few accounts which buy most of your sales (list accounts in descending order of value until they add up to 80% of the total). Give those a full credit check and only brief checks on smaller ones. Always check customers by size of debt, not alphabetical order, so you never suffer a large bad debt through lack of time.

Status Reports from Credit Agencies
Agencies should give you full customer details, financial results, payment experience of other suppliers, county court judgments, registered lending, etc. and a recommended credit rating.
Agencies may deliver instant reports through on-line terminals as well as by post or fax.
Use an agency with a complete database and a fast response.

The following companies offer services of this nature for which they will charge a fee. You should contact the company directly for more information.
Graydon UK Limited www.graydon.co.uk.
ICC Credit www.icc-credit.co.uk
UKData www.ukdata.com
Marshall Hamilton www.marshallhamilton.com

Bank References
As part of the account opening process, the credit application form includes a reminder that bank references may be requested from time to time. It can be useful to obtain a credit reference on a new customer when starting a trading relationship.

A bank reference, known within banks as a ‘status enquiry’, is a bank’s opinion as to the ability of one of its customers to meet a specific financial commitment. A bank will only give a reference if it has the written permission of its customer and normally require a new authority to reply to each and every enquiry. There is a fee for providing references which is typically met by the business making the enquiry.

Businesses should use the following steps to request a bank reference:

• Complete a request and consent form as fully as possible.

• Send the whole form to the customer and request they complete the consent section and return the form to you.

• Send the form directly to the customer’s bank using the attached letter.

The bank will base its reply on its knowledge of the financial standing of the customer in question and may also advise enquirers that they should not rely solely on the bank’s reply when making their decision. Banks use only standard phrases (e.g. 'undoubted for your figures’, ‘respectable and good for your figures’, ‘customer not known to us for long’, 'capital/resources fully employed', 'cannot speak for your figures' etc.). Anything less than 'good for your figures' is a guarded warning.

Bank references should be used only for small value decisions or to support other reports. Remember that a bank's loyalty is to its customer, not the enquirer.

Requesting references from other professional advisers to a potential customer could be considered e.g. their accountant. Again, the customer will need to give permission.

Footnote
This letter has been adapted from the book ‘Ready Drafted Credit Control Letters and Forms’ by Russell Bell.

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Trade Reference
Use only referees selected by you and not by the customer. Customers are not going to offer names of dissatisfied suppliers. Make it easy for the respondent with a printed form, tick-boxes and prepaid envelopes, as shown in the example below.

Account Experience
Existing customers provide valuable up-to-date data. Any slowing payment trend or spurious queries are triggers for further checks. Computer systems can give early warnings of changes.

Visits to Customers by Credit or Sales Staff 
It can be useful to assess premises, staff morale, payment system and company progress. You may hear 'going through a difficult phase', 'a bit of a cashflow problem', 'have to cut back on orders' etc. These should all ring alarm bells.

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Industry Credit Circles
Competitors in the same trade exchange details of slow payers and risks. Discussion of past events is permitted but collaboration to restrict further trade is not.

Credit Insurers
If you use credit insurance, your credit insurer can undertake the checks for you.

Company Accounts
The Companies Act requires public limited companies and their large private subsidiaries to state in days the average time taken to pay their suppliers and to publish this figure in their directors report. This information provides small suppliers with a broad indication of when they can expect to be paid.
In addition, the Federation of Small Businesses publishes each year league tables of the average payment times of public companies and their large private subsidiaries. This will allow small suppliers, over time, to monitor and compare the payment times of these companies.

The Federation of Small Businesses published the first league tables in December 1998.

Companies House
The role of Companies House is to incorporate companies and also to gather and relay information on these companies. They hold details of all the companies registered in Great Britain including details on accounts, mortgages and directors information, including details of disqualified directors.
Information is available by visiting their offices in person for a company search or by requesting the information by fax, post or online. Companies House also produces a wide range of publications to help companies. They provide information to their customers, including a quarterly customer magazine.

Register of County Court Judgments
The Register, which is maintained by Registry Trust Ltd on behalf of the Court Service, is a public register open to all. It contains details of almost all money judgments from the County Courts of England & Wales and these remain on the Register for six years.
Any individual, firm or company can carry out a search of the Register at a fee of £4.50 for each search. In the case of an individual, the fee is payable for each named person at a specified address. In the case of a firm, for each firm at a specified address and in the case of a limited company, for each full corporate name, regardless of address, as the title is unique and plaintiffs can sue at any place of business. This search will give details of the defendant, the date and the amount of the judgment as well as the court and case number concerned.

Every search request must be accompanied by the correct fee either by cheque or postal order.

The results of a search are normally sent out by second class post within 24 hours.

Full contact details for the Register of County Court Judgments are contained in Help and Information.

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Insolvency Service
The Insolvency Service maintains two facilities which provide information to the public, the Register of Individual Voluntary Arrangements (IVA) and the Bankruptcy Public Search Room (BPSR). 

The Register of IVAs is available for members of the public and can be inspected in person or by written request for individual entry details. Telephone requests are not accepted. Enquirers are requested to provide full details of the individual for whom they would like to search. Enquirers will then be informed of the result of any search and, where a positive match is found, will be provided with a copy of the relevant register entry together with details of the Supervisor of the IVA (who must be a licensed insolvency practitioner), whom they may contact for further details. No charge is made for searches of the Register and the supply of relevant information.

The Bankruptcy Public Search Room maintains a record of bankruptcies from 1973 to the present. Details of bankruptcies dating from 1924-1973 are available on special request but are not available for public inspection and will not be searched routinely. Bankruptcy information is held on index cards filed in alphabetical order, which contain the name and address (at the date of the bankruptcy order) of individuals who have been made bankrupt in England and Wales. The date of discharge is NOT always shown. Searches can be made in person and also by post giving the name, postal address, occupation and date of birth (or approximate age) of the individual to be searched. Requests will normally be returned on the day of receipt, by post. Search requests by telephone cannot be accepted. No charge is made for this service.