6 Warning Signs that a Client Is Becoming a Potential Credit Risk

Commercial credit risk is a fact of life for small businesses, who must contend with sudden changes in a customer’s ability to pay its debts. Initial and follow-up credit screening is the most effective way to reduce the risk of delinquent accounts, but it’s impossible to avoid all such risk.

Tune in to Customer Behavior

Here are some common-sense tips to help you recognize when a potential client or customer might be a credit risk:

  1. New Management: A senior management shakeup at a potential client company should give you pause. It’s a good idea to find out if new leadership has been brought in because of serious problems within the firm.
  2. Switching Banks: Why would a potential customer change banks? It’s a hassle for a commercial enterprise to switch banks, so it’s wise to find out why it occurs. Be especially watchful if the customer starts paying you with credit cards or personal checks after changing banks.
  3. Longer Repayment Periods: Something is amiss when a customer starts extending the time it takes to pay its debts. Ask a customer why it’s started taking more than a month to pay up, even if the delay doesn’t break any contractual obligations.
  4. New Phone Number or Address: Did a customer move because business was so good that it had to expand? That’s OK. What’s not OK is when a customer moves because it could no longer afford its previous lease. Always question when a customer downsizes. It might be a good idea, but it could have negative implications about its ability to pay its bills.
  5. Unhappy Faces: Has your customer suddenly gone from cheerful to glum? If you visit the customer, does the once efficient office now look disheveled? Sounds like something is wrong. Canvass any of your staff members who deal directly with the customer and get their gut checks – they may have some useful insights.
  6. Unexpected Disputes: If your client suddenly starts complaining about your goods or services, find out whether there is a real problem, because ulterior motives might be in play. Sometimes customers pick fights when they know they are in financial trouble, because they just might want to buy some time before paying you.

Recovering Debt

Many businesses hire a debt collection agency that works on a contingency fee basis to claim back money owed by delinquent customers. Third-party debt collectors provide several benefits:

  • They have the professional expertise and assertiveness to collect bills when your customers fail to respond to your collection efforts.
  • They free up time and resources you would have to allocate to debt collection. Do you really want to spend your time making phone calls and sending dunning letters?
  • Professional debt collection agencies employ effective tools to locate and communicate with delinquent debtors, such as innovative telephone technologies and 3rd-party sources.

The best business practice is to carefully screen customer and client credit data before extending credit, and to refer seriously delinquent accounts to a professional debt collection agency.

By |2017-05-10T10:49:05+00:00March 21st, 2016|Blog|0 Comments

About the Author:

Graduated from University of Utah - business degree 1990. Served in US Army as an interrogator / linguist, then as a tactical intelligence officer - Military Intelligence 1986-1990. Managed Western US sales operations for NY based collection agency 1990-1992. Founded Direct Recovery Associates, Inc. 1992-present