8 Reasons Your Team Shouldn't Be Doing Business Credit Checks

About 60% of all businesses offer net terms to customers. And why wouldn't they? Extending B2B credit is a great way to boost sales, drive customer loyalty, and give your business a competitive advantage.

The catch? Using the old-school method to check a customer's credit and extend net terms can cost your business in more ways than you think.

If you need a better way to manage the process but your higher-ups need a bit of convincing, here are eight reasons why your team shouldn't be doing business credit checks in house.

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  1. The old-school credit check is a huge drain on resources
  2. DIY credit checks don’t scale well
  3. If a credit check takes too long, sales will suffer
  4. Credit bureau reports are expensive and don't eliminate risk
  5. You can never be sure you're making the right decision
  6. You're exposing your company to B2B fraud
  7. Late payments can jeopardize your cash flow
  8. Collecting debt will cost your business time and money

1. The old-school credit check is a huge drain on resources

On paper, the old-school method for performing a business credit check looks pretty simple. But in reality, it's a lengthy information-gathering expedition that can take days or weeks to complete.

Here's what your team needs to go through every time they run a business credit check:

  1. Credit request: your new or existing customer applies for credit, and you send your lengthy application forms.
  2. Information gathering: once your customer has completed the necessary paperwork, it can take your team days, sometimes weeks, to process and collect further necessary info—calling references, updating your systems, dealing with credit bureaus.
  3. Evaluation: your team reviews all of the information in order to make a final call about the risk of floating net terms for this customer.
  4. Decision: it's time for your team to decide whether to extend net terms or not and determine the total credit limit the customer should receive. No matter how thorough your credit check process is, this decision is often based mostly on gut feeling and intuition.

Considering that you could outsource the entire process to a net terms management solution, you need to ask yourself whether performing business credit checks is the best use of company resources.

2. DIY credit checks don't scale well

More customers mean more business, which is great for your bottom line. But more customers also mean more credit checks, which ultimately results in more work for your team.

Sure, your accounting or Accounts Receivable (AR) team might be able to perform business credit checks at the moment. But would they still be able to handle the workload if your customer base doubled or tripled?

As things ramp up, it's common for the following issues to arise: It's tempting to make quick, risky credit decisions just to close a sale

  • Sales reps override set credit limits, which can expose you to levels of bad debt that your company may not be able to handle
  • It's harder to follow up with customers in a timely manner
  • Overdue payments can slip through the cracks
  • Mistakes and inaccuracies on bills, invoices, or credit terms are easy to overlook

According to Lockstep Collect, most companies should staff at least one full-time credit professional for every 1,000 invoices created each month, along with a backup resource and a supervisor.

Unless you plan to bring on new employees to focus exclusively on business credit checks as your customer base grows, the DIY method is not a scalable approach.

3. If a credit check takes too long, sales will suffer

Best case scenario: your team can confidently approve a customer's credit in a matter of days. But not all credit checks are created equal. If calling references and running other background checks takes longer than expected, it could take weeks to extend net terms to a customer.

Even though you're probably offering business credit to drive sales, a lengthy credit check process can scare customers away. Especially if your competitors are offering instant business credit approval and favorable net terms.

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4. Credit bureau reports are expensive and don't eliminate risk

On average, major credit bureaus charge between $40-$140 USD for a business credit report. These reports can show you things like a business's credit score, repayment history, bankruptcies, tax liens, previous lawsuits, and risk of failure. But even with all of that information on hand, it's still up to you to decide how to act on that information.

What factors will you use to approve a customer's credit application? The business's experience, their policies, their sales data? Maybe the person you're dealing with just gives you a good vibe?

And when you do decide to approve a request for business credit, how much credit will you actually extend and what net terms will you provide? 30, 60, or 90 days? 

This is where a B2B net terms management solution like Resolve has the upper hand. We process tens of thousands of credit applications a year, which gives us the data and the experience required to benchmark a customer's credit profile against thousands of others, spot trends, and eliminate unnecessary risk.

Unless you plan to review thousands of credit applications every year, there's no way your interpretation skills and internal processes will be sharp enough to spot every red flag before it's too late.

5. You can never be sure you're making the right decision

Just because a customer checks out on paper—a healthy credit score, no outstanding liens, glowing references—there's no way to guarantee that you're making a "good" decision when you approve their credit request.

A business that's doing well now could default on their credit in the future for any number of reasons. Take the pandemic as an example. Entire industries were wiped out during the first wave of unexpected lockdowns. Overnight, thousands of businesses had no ability to repay outstanding invoices.

Ultimately, your business is acting like a bank when it extends credit to customers. You might think you're making a sound decision based on the old-school credit check process. But if your customers' circumstances change, your company could find itself on the hook for sudden, excessive debt that will never be repaid.

6. You're exposing your company to B2B fraud

Sadly, businesses defrauding other businesses is a tale as old as time.

  • In 2018, the Association of Certified Fraud Examiners reported that U.S. businesses would lose an average of 5% of their gross revenues to fraud.
  • According to the AFP, 78% of businesses experienced attempted or actual B2B payments fraud last year.
  • Credit bureau Experian reported that B2B fraud is a multi-billion dollar per year problem for U.S. businesses.
  • If your credit check process isn't robust enough to catch bad players, you may end up floating net terms to a customer who has zero intention of paying you.

7. Late payments can jeopardize your cash flow

When customers fall behind on their payments, cash flow suffers. Maybe your company could probably handle a few late payments here and there. But if enough customers defaulted on their payments to cause serious cash flow issues, your business could find itself in a sea of trouble.

For argument's sake, let's say the worst comes to pass. Here’s a look at the cash flow woes that could impact your organization:

  • Your team would shoulder an additional administrative burden, just to stay on top of delayed payments
  • Your company could be forced to default on payments to vendors
  • Vendors might charge overdue fees for late or partial payments
  • Your business credit rating could take a hit
  • Lack of funds would reduce your company's ability to keep trading, advertising, and scaling
  • You may need to seek a loan or additional funding to cover the debt
  • Worst case scenario: you'll run out of cash entirely

It sounds so extreme that you might think it could never happen to you. But according to Freshbooks' analysis of over 20 million invoices, 64% of small businesses have to wait for late invoice payments and 60% of small businesses suffer from cash flow optimization challenges every single month.

Before you decide to perform business credit checks and extend net terms to customers, ask yourself if it's really worth the risk.

8. Collecting debt will cost your business time and money

When a customer doesn't meet their repayment schedule, writing off the loss will put a dent in your bottom line. But have you also factored in the cost of attempting to collect that outstanding debt?

With your in-house team pursuing every overdue payment, you're adding to your overall employee salary costs. Hand the debt over to a collection agency? There's a fee for that, too.

Why not outsource your credit processes & eliminate risk

There's a better way to manage credit checks and net terms, it's called Resolve. Resolve is a complete B2B credit management and net terms solution. We take care of credit checking, credit line approval, advance payment of net terms invoices, payment processing, reminders, and collections (if needed). In short, we're a credit team on tap. Resolve can check your customer's credit in minutes, not weeks. This is because we have access to proprietary databases and the final decision is made by our dedicated and experienced credit specialists.

How does Resolve make net terms risk-free? Resolve advance pays up to 90% of approved customer's invoices - within 1 day. Then your customers get 30, 60, or 90 days to pay us. It's risky to float your own net terms, let us take on the risk for you, and with fees that are cheaper than credit card processing.

Ready to find out how to improve your credit processes and get risk-free net terms?

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