How to Do a Credit Check on a Prospective Customer

About to extend credit terms to a new customer, lend money, or ship goods before payment? A credit check tells you whether they are likely to pay you back. This guide walks through how to run one on a prospective customer so you can decide who to trust with your invoices.

Why Run a Credit Check

Whenever you let a customer pay later, you are effectively acting as their lender. A credit check shows their payment history, outstanding debts, and any red flags like liens, judgments, or past bankruptcies. That information lets you set the right credit limit, decide whether to require a deposit, and avoid the customers most likely to leave you chasing an unpaid bill.

What You Need First

For a business customer, you can pull a business credit report from agencies like Dun & Bradstreet, Experian Business, or Equifax Business using the company name and address. For a sole proprietor or a personal guarantee, you may need to check the owner's consumer credit, which requires their written consent and a permissible purpose under the Fair Credit Reporting Act. Always get a signed credit application before you pull anything personal.

Nuances by State

State laws differ on how you may obtain and use credit information. Each state can set its own rules on the permissible methods of pulling credit, the use of credit reports for business purposes, and the protection of consumer data. Check the laws where you operate before running a check, and keep the signed consent on file to stay compliant.

Example Scenarios for Conducting a Credit Check

Scenario 1: Small Business Loan Application

Imagine your company is considering providing a small business loan to a new customer. Before approving the loan, you decide to conduct a credit check to assess the customer's creditworthiness and repayment history. By reviewing the credit report, you can determine the customer's financial reliability and make an informed decision on whether to proceed with the loan.

Scenario 2: Supplier Credit Evaluation

In another scenario, your company is exploring a partnership with a new supplier who offers credit terms for purchases. To ensure the supplier has a solid financial standing and can meet their credit obligations, you conduct a credit check on the supplier's business entity. This allows you to evaluate the supplier's financial health and assess the risks associated with extending credit terms for purchases.

Other Questions to Consider

• What are the key factors to look for in a credit report when evaluating a prospective customer's creditworthiness?
• How should the results of a credit check change the terms you offer?
• Are there alternative ways to assess a customer's creditworthiness without a formal credit check?

A credit check is a quick way to keep bad debt off your books before it starts. Get written consent, pull the right report, read it against the laws in your state, and you can extend credit to the customers who will pay and protect yourself from the ones who won't.

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