If you're like many small-business owners or burgeoning entrepreneurs, you've undoubtedly experienced the uncertainty, frustration, and downright desperation that accompany unpaid invoices and late client payments. At first, you try to give them the benefit of the doubt – they have a lot on their plate! – so you write a polite, gently prodding email. But as the weeks drag on without a word or check from the client, you start scrambling. How are you going to pay your bills when your client won't pay theirs?
If your clients keep giving you a literal run for your money, maybe it's time to start vetting them more carefully. It's easier than you think: simply check out their business credit reports.
Manage Nonpayment Risks with Business Credit Reports
Forbes notes that business credit reports have been a staple in the corporate world for a while, but they were too pricy for small-business owners to use as a regular part of their risk management. However, thanks to technology, amassed data, and increased competition, business credit reports are affordable – some credit bureaus even offer subscription-based services so you don't have to pay for reports individually.
What can these reports tell you about prospective clients you might take on? According to Forbes, the reports show you…
- How many days past the due date a company pays its bills, which can clue you in on what to expect.
- The number of inquiries made about a particular company – too many could indicate financial trouble.
- The company's financial obligations and payment history.
- Any legal judgments, tax liens, or bankruptcies filed against the business.
- The company's structure, including the management team, directors, and affiliate businesses.
- The company's credit score and credit limit, which indicate its financial health.
If you have all this information at your fingertips, you won't have to guess about the business's financial behavior or solvency. You can scan the report and have a good idea about whether you'd be taking on a potential nonpaying client.
Make that Money, Honey: How to Put Business Credit Reports to Use
A business credit report may not be a sure indication of payment patterns to come, but they can help you decide which clients you want. Though you may be tempted to take any new business that comes your way – especially when you first start out – turning away risky clients allows you to focus your energy on attracting customers you want to work with. (Related reading: "Make a Better Impression on 88% of Your Potential Clients.")
Business credit reports can also help you plan for how to handle risky clients. For example, if a prospective client has a history of paying a month past the due date, you might…
- Turn down the new customer.
- Demand payment upfront.
- Manage your cash flow in anticipation of the slow-paying customer.
Getting the money you're owed should be at the forefront of your risk management plan – it even outpaces (gasp!) investing in small business insurance. After all, you won't have much time or resources to dedicate to growing and protecting your business if you're always hunting down customer payments.
Plus, if you regularly do business with clients who actually pay you on time, chances are you'll develop a good relationship with them. That can help you earn repeat business and referrals – the holy grails of a thriving business.