How to check a customer’s credit

By Guest Blogger: Michelle Dunn

One of the most important things you must do in order to manage your business credit successfully is to check a customer’s credit and decide on a realistic credit limit based on their credit worthiness.  Once you have a new customer walk in the door and they want to apply for a revolving credit account, you must check their credit history in order to make an educated decision on how much credit you want to extend to them or how much of a risk you are willing to take based on the credit limit you give them and their ability to pay you back.  If you have a signed credit application you may pull a credit report or contact the references they provided.  Take notes and always get the persons full name, title and extension that are providing you the reference information.  Many people ask me what types of questions I should ask when checking references, so I want to give you a list of questions you can ask that can help you make an educated decision.

  • How long have you known this customer?
  • How long has this customer been doing business with you?
  • What payment method does this customer normally use?
  • Does the customer pay within terms, late or early?
  • What is this customer’s average balance and how much of that is past due?
  • What is the average amount of this customer’s normal order?
  • How often does this customer place orders with you?
  • What are this customer’s payment terms with you?
  • Does this customer make many returns?
  • Does the customer take unauthorized discounts?
  • What has this customer’s high credit been in the last year or 6 months?
  • Is the customer’s account current right now, today?

When you contact a potential customer or customer’s bank for a credit reference, many times you will have to fax over a copy of the signed credit application so they have proof that they have permission to share this information with you.  Once you do this, there are specific questions you want to ask their bank.

  • What type of account do they have? Business, personal, savings, loan or checking?
  • When did they open this account?
  • What is their average daily balance?
  • Have they had any returned checks for any reason? If yes, when was the last one and how many in the last 6 months?
  • Do they have any outstanding loans? Are they current?
  • Are the loans unsecured or secured?
  • Are the loans being paid as agreed?

As you check someone’s credit you want to keep an eye open for some red flags and just some general practices.  For example, do they pay their other bills on time or late, are they frequently past due with other vendors, do they have a seasonal pattern when making payments, did they always pay on time but now pay late due to marital issues, the economy or unemployment, what are their anticipated monthly purchases, and will this customer agree to pay COD or cash on delivery while you check their credit worthiness.

This is an excerpt from Michelle Dunn’s newest book, “Credit and Collections, a business perspective” being published by Cambridge Scholars Publishing March 1, 2013.  Dunn is an expert on credit and debt collection and has worked in the industry for 26 years.  Learn more at