Why Credit Checking Doesn't Work

I recently worked with a client who credit checked all their customers before offering payment terms, in theory they were really hot on managing debtor days and providing payment terms based on credit checks.

In theory their approach was textbook, terms of business based on an apparent ability to pay and be good for the invoice.

My involvement was when the business had a cash shortage due to non-payment of a large invoice, their customer had stopped trading even though the credit check run three weeks previously had been near perfect.

In short, for them credit checking failed.

The Big Negative

The problem with credit checking your customers is that the data you are looking at is historic. It is more recent than it used to be but is still historic. There is a lag between what is happening now and what shows.

In short, it takes time for a business to run out of cash. The reason it runs out of cash can vary, ironically it doesn't have to be a financial event that forces it.

When the event is not primarily financial then the credit report will let you down.

Google & Credit Check

In this case the debtor was based 250 miles away. Their factory had caught fire and burned to the ground, it was high profile news locally but not beyond that. The fire had destroyed all stock and all equipment.

The company in question was trying to recover itself but in all likelihood it would eventually cease trading.

Had my client run a google or media search, or used google alerts with their debtor's name then they would have picked up the story. It wouldn't have stopped them having an unpaid invoice but it would have allowed them to change their plans and adapt much earlier. Some of the spending they had planned could have been delayed rather than committed to.

If you consider how quickly the world moves then it becomes apparent that relying on a credit check is not enough. If you have debtors and are seeing your debtor days move then check the media, search and put a process in place to pick these things up.

Whilst I love looking at businesses and financing cash flow, I would always rather do it from a positive perspective and if a little story helps then it is well worth telling.