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Extending credit to a customer feels like a win in the moment. You landed the deal and the revenue is coming. But if you skip the step of actually evaluating who you are doing business with before you extend terms, you are taking on a risk that can hurt your cash flow for months or in some extreme cases cause you to close up shop. Yep, it happens.
Here is what a basic credit analysis looks like and why it matters for your business.
Start with a credit application Every new customer who wants to pay on terms should fill out a credit application before you agree to anything. This document captures basic business information, trade references, banking information, and authorization to pull a credit report. It sets a professional tone from day one and gives you the information you need to make a smart decision.
Pull a business credit report Services like Dun and Bradstreet, Experian Business, or Equifax Business give you a snapshot of how a company pays its bills. Look at their payment history, any outstanding liens, and their overall credit score. A company that consistently pays late with other vendors will likely pay you late too.
Check trade references Call the references they provide. Ask how long they have done business together, what their credit limit is, and whether they pay on time. Most people skip this step because it takes a few extra minutes. Those few minutes can save you thousands.
Review their financials if possible For larger accounts or significant credit limits ask for basic financial statements. You want to know if the business is stable and generating enough cash flow to meet its obligations. A business that is struggling financially is a collections risk waiting to happen.
Set a credit limit based on what you find Once you have reviewed everything set a credit limit that reflects the risk level of that customer. Not every customer gets the same terms. A newer business with limited history should start with a lower limit and earn their way to more over time.
Review credit limits annually A customer's financial situation can change quickly. Build a habit of reviewing your top accounts at least once a year to make sure the terms you extended still make sense. Catching a problem early gives you options. Finding out after the fact does not.
Credit analysis is not about being difficult to do business with. It is about protecting the cash flow you worked hard to build. The businesses that manage credit well collect faster, carry less risk, and spend far less time chasing past due invoices.
Inside The Profit Platoon we cover credit, collections, and all the financial systems that keep your business running the way it should. It is built for veteran entrepreneurs and SMB leaders who want to stop leaving money on the table.
The Hustle: Claude Hacks For Marketers
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One Shark Missed Billions… Another Saw This Coming
Imagine turning down Uber at a valuation of $10 million only to watch them go public at over $80 billion.
That’s exactly what happened to Mark Cuban… a 799,900% return, gone.
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They were named the #1 fastest growing software company by Deloitte and have already helped their users earn and save over $1B.
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