Trade credit is an integral part of B2B transactions because it allows customers to purchase goods and services on credit. This can encourage sales and facilitate business growth. However, any time you provide goods or services on credit, you increase your business’s exposure to late payment or default.

Hence, before extending credit to your customers, it is essential to assess their creditworthiness to protect your business against non-payment. This can also be a great way to ensure that your customers have the ability to repay their debts.

5 Ways to Assess the Creditworthiness of Your Customers

1. Check Credit Reports

Checking credit reports is one of the most effective ways to assess a customer’s creditworthiness. This provides a detailed, up-to-date payment history, company information, financial data, and insight into debt management. This can also help illustrate credit scores and a business’s ability to pay invoices.

Running credit reports with leading credit reporting agencies such as Equifax, Experian, and Illion can provide a detailed view of a business’s credit history. This can also help identify potential areas of concern, such as excessive debt or late payments.

2. Check a Company’s Financial Statement

Checking the financial statements of a business or potential customer can provide critical insights into their creditworthiness. Review trends such as profitability, revenue, and cash flow statement to see if the customer can fulfil their financial obligations.

This is important because it allows you to evaluate the company’s financial health before extending credit. This can also provide insight into a company’s assets and liabilities. Checking financial statements can also help you detect red flags that could indicate a higher risk of default.

3. Determine The Company’s Debt-To-Income Ratio

This is the ratio of the company’s total debt to its total income. Calculating this ratio can help you determine its creditworthiness. To compute the debt-to-income ratio, divide the company’s debt payments by gross income (monthly).

The debt-to-income ratio reveals what the business’s debts account for in its revenue. You can access these figures from the company’s financial statement. It is best to understand the baseline ratios of different industries so you can know what is considered reasonable in your industry.

4. Ask for References

Asking for references can be a great way to determine a customer’s creditworthiness. A customer’s references can provide invaluable insights about their payment history and financial situation, which can help you assess the customer’s creditworthiness.

In addition, references can reveal the customer’s identity and offer insight into their character, which in most cases, impacts their creditworthiness. While at it, check the following details:

  • The number of times the business has extended credit to the client
  • The customer’s last purchase and the amount
  • The credit limit the business has extended to the customer
  • Identify any history of late or non-payment

5. Evaluate Regional Trade Risk

It’s also important to investigate the conditions that could potentially influence your regional trade. This may involve checking the risks available in the geographical area where your customer is located. The political situation, economic instability, and fluctuations in currency exchange rates are some of the trade risks you need to investigate before extending credit to your customer.

Read more: What are the Most Common Types of Political Risks

Protect Your Business With Trade Credit Insurance

Niche Trade Credit gives you an opportunity to reduce your credit risks with credit insurance. This helps insure your accounts receivable and shield your business from bad debts. Contact us today for a free credit risk assessment to get started.

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By Jesse