What to Check About a Company Before Extending Credit to Them

You've got a prospective customer. Excellent! No doubt you want to get to work right away with this new company. Try to hold back your excitement for just a moment, however, and ask yourself, "What do I know about this client?"

Before you begin a relationship and extend credit to a new client or customer, you should always take a day or two to learn some simple facts about them. After all, you don't want to invest a lot of time or money in a new customer only to not be paid for your efforts.

A few things to check before shipping one-third of your inventory to a new store or flying your top three consultants out to a new client site:

Is the prospective client a corporation, a partnership or a sole proprietorship? If your client company is a corporation, you can collect money only from that corporation. If the company goes out of business, you are not going to get paid. An individual within the company is not responsible for the company's debts -- even if that person is the chairman, CEO or president of the company.

If the company is a partnership or a sole proprietor, the individuals heading the company are personally liable for the debt owed to you. The only real difference between a sole proprietor and a partnership is the number of people involved in the company. However, if these individuals file for bankruptcy, you probably will not get paid.

How long has the company been in business? The length of time a company has been in business is a good indicator of whether or not you'll get paid. If you find out a company has been operating successfully for five or more years, chances are it pays its bills. With new companies -- especially those that have been in business for less than a year -- you'll have to do more research.

Do you have references to check for this company? If you are thinking about doing business with someone, it is imperative to find out about them from other sources. Checking references is a good way to learn about the standing of the company. When checking references, call at least two. Sometimes both references will have the same comments about a company; other times, they will contradict each other. If that's the case, proceed cautiously into a credit arrangement. Ask for a third reference and don't ship too many goods or spend too many hours servicing the client before getting a first payment.

Do you know if the company pays its bills? The Internet offers several services designed to give you a simple rating of a company's credit history. The services are quick and inexpensive compared to lost revenue from unpaid bills, so don't bypass this step in the credit-screening process.

What is the company's bill-paying pattern? Do you expect to be paid in 30 days, 60 days or 90 days? Typically, when most companies start doing business with a new client, they ask to be paid within 45 days after sending an invoice. A 60 day billing cycle is also not uncommon. If a new client asks for longer than 60 days to pays its bills, be careful about proceeding and closely monitor your relationship. Remember, a contract does not guarantee anything. It merely means that you should get paid. The goal is to be sure that the company will honor your contract.

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