If you're going to offer a customer credit terms, you need to know they can pay you back. A customer credit check tells you that before you commit, and before an unpaid invoice becomes your problem instead of theirs.
If you're still mulling over whether to extend credit at all, our guide on should you extend customer credit explains the benefits and risks. And this guide picks up from there: once you've decided to offer credit, here's how to check the specific customer in front of you.
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A customer credit check means reviewing the credit risk of a company, their payment habits, and existing debts before you set their credit terms. It gives you a health score for that business, so you can see how likely they are to pay on time.
You should always run the check on every new customer before you agree terms, then revisit it periodically for any existing customers. A business that's paid reliably for years can still hit financial difficulty, so treat this as something you carry out regularly.
Here’s how to run a credit check on a customer:
Before you request any external checks, ask the customer to complete a credit application form. This will give you what you need and shows them you take credit decisions seriously.
Ask for:
Remember that the bigger the credit line, the deeper the check you should run. Start with the basics for a modest request and work through every step for a larger one.
The next step of the customer credit check process is collecting the right information about their creditworthiness. An audited financial statement is the gold standard data for understanding your customers' financial position. This is especially important in how to run a credit check on a new customer, but there’s a challenge: not all privately held customers may be willing to share their financial statements with you upon request.
Fortunately, there are several other sources of information:
Every UK limited company must file annual accounts and a confirmation statement with Companies House, both free to view. You won't get a credit score here, but you'll get a fast, no-cost check on whether a business is active, up to date with its filings, and who's running it.
You should treat a status marked "in administration" or "liquidation" as a red flag straight away, and a company that often files its accounts late needs a closer look, even if its status still shows as active.
If you're checking a sole trader rather than a limited company, the Individual Insolvency Register is the equivalent free source. This covers bankruptcies, IVAs and debt relief orders for individuals, but not limited companies, as they are covered by Companies House itself.
A business credit check through a credit bureau gets you a company credit report sold to qualified lenders, covering annual sales, invoice activity, credit limits and a business credit score, usually out of 100, with anything above 75 treated as strong.
Keep an eye out for County Court Judgments (CCJs). You can check the Register of Judgments, Orders and Fines directly for a small fee, and any record of legal action over unpaid debts is a strong warning sign, regardless of how the rest of the report reads.
Bear in mind that credit reports are based on information made available by the provider according to that moment in time. This means the information may be upwards of a year old and may not reflect real-time developments in the company's creditworthiness. You may have to combine credit reports with additional credit assessment tactics, such as risk data analysis that comes with a trade credit insurance policy.
You can also ask your customer for trade references, which can include the customer’s bank, as well as businesses or suppliers that already extend trade credit to that customer. For example, you can ask how long the business or supplier has extended credit to the customer, how many times they were late to pay, etc.
However, be careful about bias when reviewing these references as the customer is likely to have provided information on companies they pay on time and omit companies that they don't. And be conscious that collecting this information can consume a great deal of time as you are dependent on receiving timely replies.
Chambers of commerce and other local business organisations can also attest to the customer’s reputation in the industry and provide ‘soft knowledge’ about your customers’ values and involvement in the communities where they operate.
Another source of information can be your trade credit insurer. Trade credit insurance offered by an international expert such as Allianz Trade includes customer credit check services as part of the policy. Our proprietary intelligence network analyses daily changes in over 80 million corporates’ solvency and attributes a health score to all companies via a risk grading. This customer health score helps you make accurate credit decisions.
So, you get a data-backed health score without piecing one together yourself. Our guide to building a network of creditworthy partners goes further into ongoing credit monitoring.
When you think about how to assess the credit risk of a company, and how to run a credit check on a potential customer, you should have a solid approach. These are the key items we review in the customer credit check process:
There are several key warning signs of pending insolvency which you should consider when running a credit check on a new customer.
Turnover and profit are a measure of solvency because the higher the profits, the more stable the company. So, it’s an important element in your customer credit check.
Does the company have sufficient business liquidity to refund short-term debts? When a business has many suppliers with long-term payment terms, or when it has no cash resources, the continuity of this company is seriously compromised because chances are if a supplier demands payment of a debt, the company can’t afford it. This has a negative effect on the solvency of a company.
Our guide on preventing cash flow problems explores this from the other side, if it's your own business at risk rather than that of a customer.
This calculation shows you what portion of the company’s debts make up its earnings. To determine the ratio, divide the company’s monthly debt payments by gross monthly income (available from the company’s financial statement). The lower the number, the better. However, good debt ratios vary from industry to industry so make sure you understand what those baseline ratios are.
If any of these signs show up, our guide on assessing and reducing customer default risk goes further into what to do next.
A clear customer credit check means setting a limit that matches what you've learned, and not unlimited credit. Base it on the customer's turnover, how established the business is, and how the size of your invoice compares to their overall financial position. A larger, well-established company with strong filings can normally support a higher limit than a newer business with a thinner track record, even if both passed the check.
You should reevaluate the limit as the relationship develops. A customer who pays reliably for a year is a different risk to the one you assessed on day one, and their limit should move with that, in either direction.
If you're insured with us, our guide to understanding credit limits explains how approved and discretionary limits work under your policy.
Credit checks don’t always produce favourable results. If a customer credit check comes back negative, you should send a polite, tactfully worded note to the customer indicating that you are unable to extend credit.
For example:
"Thank you for contacting us regarding your interest in doing business with our company.
“Unfortunately, we regret to inform you that due to the state of the economy and the uncertainty inherent in our business, we’re unable to grant your credit request at present. We’ll inform you when our credit policies change, and we sincerely hope that this doesn’t affect our business relationship."
A weak credit check doesn't always mean a straight yes or no. If the numbers are borderline rather than alarming, a third-party guarantee, such as a legally binding agreement where someone else commits to paying if the customer doesn't, can let you extend credit you'd otherwise decline. So, perhaps raise this as an option before you refuse.
A customer credit check won't always give you a clear answer, and other factors can still make a customer worth the risk. Their market segment might be poised to grow. Profitability may have dipped while they invested in expansion. Or you simply don't know a new customer well enough yet to judge them on the numbers alone.
In these cases, a pro-forma approach lets you move forward without exposing your full invoice value: ask for payment upfront on the first few transactions, then use that track record to decide whether they're ready for credit terms.
Get a free trade credit insurance quote and find out how much cover would cost for your business.
To credit check a new customer, assess their financial health, payment history and ability to meet their obligations. You can find more detailed information in this article.
That depends on where you look. Companies House and the Insolvency Service are free to search. Credit bureau reports usually carry a fee, and the cost varies by provider and how detailed a report you need. Trade references and chambers of commerce cost you time rather than money. If you take out trade credit insurance, ongoing customer monitoring is built into the policy, so you're not paying per check as your customer base grows.
Some common red flags in a business credit check include declining profitability, weak cash flow, high levels of debt, and insolvency proceedings. Such businesses are candidates for closer monitoring or lower credit limits.
Not for everything. Companies House and Insolvency Service data is public, so you can check it freely without asking. Credit bureaus and trade references are different, and this is exactly what the consent section of your credit application form covers, and you should have that signed before you approach either.
A soft check looks at a business's credit history without leaving any mark on their file, and it's what most business credit checks are. A hard check is more commonly associated with personal credit files, and it can apply if you're assessing an individual guarantor as well as the business itself. For a standard customer credit check on a limited company, you're almost always working with a soft check.
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Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate the risks associated with bad debt, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, Surety bonds, Business Fraud Insurance, debt collection processes and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.
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