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Implement Robust Credit Controls

When a new business-to-business (B2B) customer comes to you with a large first order, your immediate inclination may be to open a bottle of champagne. However, there are risks involved in all credit accounts that it would be foolish to ignore.

The most obvious risk of providing credit is that the customer may not pay their bills. But there is also the possibility that you are about to become the victim of fraud. The other crucial question you must ask is whether you afford to carry the debt for 30, 60, or 90 days.

Credit control begins with a process to vet new accounts before accepting orders. However, merely ticking boxes on a checklist will not protect you against bad debts. You also need to take a step back and ask yourself a few crucial questions. Here are ten questions to ask before you accept a high-value order from a new B2B customer.

1. What Was the Result of the Credit Check?

The first thing to do when opening any customer credit account is to carry out a business credit check. A credit check will confirm that the company you are dealing it exists, and it will provide you with an indication of the company’s creditworthiness. Typically, the credit score on a commercial credit report will be between 0 and 100, where 100 is the best rating. There will usually also be a traffic light system displaying green for good credit history and red for poor. Most credit agencies also provide a risk summary.

2. Is the Credit Limit Reasonable?

It is usually best to set a low credit limit at first, or you could ask for a down-payment against the first few orders for a new customer. The questions to ask yourself are whether the proposed credit limit is manageable for you, and if the limit is reasonable for the company placing the order. Suppose a small local business wanted to place an order for $100,000 worth of office supplies, for example. Then the questions would be why they need that, and whether the small company can afford to pay for those goods.

3. Do You Have Sufficient Working Capital to Finance the Account?

Ensuring that you get paid for the products you supply on credit is only one aspect you must consider before accepting a large order. The other thing you must ask yourself is whether your business can fund that credit. When you supply anything on credit, you are effectively becoming a lender. Your company will be financing the cost of the goods sold for the agreed credit period, or longer, out of working capital. If you do not have sufficient working capital to cover that financing, granting credit could cause cash flow problems.

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay their invoices, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

4. Can You Afford to Lose the Money?

Most B2B credit accounts will operate without a hitch, and, in many sectors, you cannot do business unless you offer credit facilities. However, it would be wise to remember that, occasionally, things do go wrong. And even credit accounts that pass all the above credit control tests can let you down. So, it would be best to factor your company’s ability to survive the non-payment of an invoice into your credit granting decision-making process.

5. Has the Company Confirmed the Account?

As a double-check that the purchase is legitimate and approved, it would be best to check with the company that the account has been set up before you ship any goods. A phone call to the finance or purchasing department should confirm this. Some big companies have strict purchasing and supplier approval controls. So, it would be a good idea to check that you have been approved as a supplier. This step will help to protect you against fraud, and it will also ensure that you don’t ship a large order only to have the goods returned, which could leave you with surplus stock that will take time to sell to someone else.

6. Does the Individual Have the Authority to Place the Order?

As well as the risk of late or non-payment, it would be best to protect yourself against the risk of fraud. It is possible, for example, that the individual you are telling to is not an employee of the company they say they represent. Another possibility is that an employee of your customer does not have the authority to place purchase orders. The best way to protect yourself against these risks is to insist on an official company purchase order. Then, you can double-check the validity of the order by contacting the company directly.

7. What Did the Trade References Say?

It is generally also a good idea to take up trade references for new credit customers. The credit reports will provide a good overview of a company’s creditworthiness. Still, credit reports can contain errors and may be out of date. Of course, your new customers will only give you the names of companies they know will provide good references. However, a business in serious financial difficulties may find it difficult you find a vendor willing to provide a perfect reference. Most companies will give honest references. However, companies will be unlikely to offer their opinion of creditworthiness. It is best to ask specific questions, like how long the account has been open, the credit limit provided, and how often the customer has paid late.

8. Are the Goods Readily Resellable?

The need for the above precautions will, of course, depend on the value of the order, and the ability of your business to bear bad debts will also come into play. Suppose the potential loss of $500 is not material for your business. In that case, you may decide that the cost of completing all steps above outweighs the potential risk. However, it would be worth noting that the type of products you sell might increase fraud risk. If your products are readily resellable on the black market, you might want to take more care with credit checking. High-value consumer products, like TVs and computers, would fall into this category.

9. Is the Delivery Address Correct?

If the delivery address on a customer order does not match the company address, the alarm bells should be ringing. It may be a genuine branch office of the company or a warehouse facility. However, if the delivery address appears unrelated to the purchasing company, it would be best to make further inquiries before shipping any goods.

10. Does It Feel Right?

It is always best to err on the side of caution when accepting new customers’ high-value orders. It would be easy to convince yourself that everything looks good when you have an order that could be the making of your business. You might even be tempted to ignore some of the warning signs mentioned above. However, if something doesn’t feel right, and non-payment would have severe implications for the business, it would be best be to trust your instincts.

The Bottom Line

B2B credit is not inherently risky, but it is wise to be cautious about granting excessive credit without carrying out the appropriate due diligence. Companies would be well-advised to implement robust credit control procedures to ensure that all credit accounts are adequately vetted before goods are shipped. If in doubt, ask for a down payment with high-value orders, or fulfill the order in smaller quantities and ask for payment of each invoice before the next shipment is made.

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About Universal Funding

Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.