Why credit check?
When you allow customers time to pay, it should be a conscious decision - 'we believe this customer can and will pay us on time' - based on knowledge, not an accident of selling.
- 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.