Doing Credit Checks Can Really Pay Off

Credit Reports Can Save You Money

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Customers and clients seem to expect to be granted credit as a matter of course. But as a small business owner, you can't afford to extend credit to everyone. Doing a credit check on a customer before you extend credit can really pay off. After all, if he or she doesn't pay, you're the one that's out of pocket.

The Problem With Not Doing Credit Checks

Many small business owners operate on faith, as it were, doing a credit check by asking the customer for references.

This is a fine system in an ideal world where everyone is honest. If we lived there, we wouldn't have to run credit checks in the first place.

The problem with using references as credit checks is that customers with blemished credit records are familiar with the process and of course have carefully selected their references so that you get only the polished version of their credit history when you inquire.

If you're concerned about extending credit to a customer or company, invest in a credit report. A credit report will give you the information you need to make a decision about whether or not to extend credit.

A credit report will include a customer's historical payment data, bankruptcy records, any lawsuits, liens and court judgments against a company, and a risk rating that predicts how likely bill payment is - all the information you need to make an intelligent decision about whether or not to extend credit.

How to Get a Credit Report in Canada

How do you get a credit report on a particular customer? In Canada, you use a credit bureau, an independent agency that provides information on an individual's or company's credit history. The fee for a credit report ranges from about $20 through over $1000, depending upon how detailed the credit report is.

In most cases, you need to become a member of a particular credit bureau before you can access their services because credit reports on other people or businesses are not available to just anyone.

In Canada there are two major national credit bureaus:

Equifax offers both commercial and consumer memberships, allowing you to get credit reports on both businesses and individuals;

TransUnion Canada offers credit report services to subscribers, as well as related products such as fraud prevention tools.

Once you've become a member or subscriber of the credit bureau, you'll be able to access credit reports online, although you can also have them sent to you via mail or fax if you prefer.

Note that credit reports are not guaranteed to be absolutely correct - there are hundreds of millions of reported entries and mistakes are common - some experts estimate that there are errors in 10 to 33 per cent of credit files.

Refusing Credit to a Customer

If a credit check comes back negative you should send a polite note to the customer informing them that you cannot extend credit at this time. This should be done as tactfully as possible to avoid offense.  The note should state why the request for credit has been denied, thank the customer, and offer solutions such as cash payments.

Make Credit Checks a Habit

Accepting only the amount of risk you're comfortable with is a good way to go through life. Using credit reports to do credit checks on customers can be a good investment both in terms of your finances and your peace of mind.

For more about good cash flow management see: