Article published on: 27/02/23
By performing a credit check on any perspective customers, you will receive a report on that company’s financial background. This typically is a 6-year timeframe however can vary depending on which company performs the check and will present to you all loans, credit card purchases, mortgages and other borrowings that company has had a part in – ultimately giving you a an overview of their credit health. From this you can screen all potential customers to see if they could pose a risk due to past worrying activity such as bankruptcy or masses of debt.
Below are our three top reasons why you should perform a credit check before suppling temporary agency staff to a potential customer.
1 Reduce the risk of a non-payment
A non-payment can be detrimental to the cashflow of a small business, especially in the early days of starting up. In recruitment, you shouldn’t supply any temporary agency staff before having thoroughly researched the potential customer first, as without a clear look at the customer’s past payment and credit history, you cannot accurately judge whether the prospective customer is trustworthy and will pay you on time.
As it usually covers 6 or so years of past financial history, a credit check is great indicator of how a customer is likely to behave in the future - helping you to make a more informed decision when deciding if you should work with them.
If you work with a payroll management company, or alongside your financier’s in-house credit team, they usually offer a credit check and the appropriate due diligence as part of their service. Just be sure to inform their teams of your plans to work with a new customer to ensure they are creditworthy before you begin.
2 Control bad debt
Similarly to the above, prior planning in the form of credit checking your prospective customers is one way to help control your risk of accumulating bad debt. Often due to really late payers as well as non-payers, bad debt can quickly mount up if you have too much money going out and not enough coming in. This can be a huge issue if you work with a finance provider as you could end up maxing out your credit limit they have agreed with you, and unless you have other funds available, you could struggle to pay your temp staff.
Reducing your aged debt and having your invoices paid promptly is crucial to preventing debt from mounting up, therefore credit checking your customers before supplying to them can give you an idea of how healthy their debt is and spot any warning signs.
Sometimes the worst can happen, and customers can close for several reasons, so taking out a bad debt protection policy is also advisable. This makes sure you still get paid if a customer should become insolvent or are unable to pay the invoices they owe, once again, your funding provider would supply a protection policy as part of their service.
3 Help set credit limits
Setting credit limits for a new customer can be a tricky process. If they are a long-standing customer of yours with a proven history of prompt payments especially on bigger purchases, you have reasonable cause not to doubt them. But with new customers, the larger the amount of credit you offer, the greater the risk of taking them on, this is where a credit check will come in.
From a credit check, you’ll be able to see the financial trends in the company via their current figures vs the last few years and gain a more accurate picture of their performance. However, this isn’t to say their past trends will carry over into the future, so it's always better to start with a small limit and increase it over time.
When working with a funding provider, they will advise what funding limits to set in relation to the one they have with you. That being said, choosing the right recruitment funding provider that can offer a tailored service is very important when you consider what’s at stake. If your financier were to go into administration, you would need to find a suitable alternative within a week who could buy all your existing debt and support your set credit limits.
For information on our invoice finance offering for recruitment agencies, please see our Introducing CashFlo page for more details.