Vendor Risk Management: Step-by-Step Checklist When Considering Credit

Key factors to watch out for before granting credit


If you have a client or customer who you are considering extending credit to, there are a few things you should understand before you do so. Anyone with a shred of business sense should understand that not everyone who asks for credit from you deserves it.

In fact, many less than honest people begin in just this manner: they ask for credit, maybe make a few payments, then come up with virtually every excuse in the book for why they can't pay the remainder.

What follows are a few ideas for what you should keep in mind before extending credit to a client or customer.

1. Reputation. It's a sad fact--or a good one, depending on who is telling the story--that reputation speaks loudly for a person. In fact, even with more concrete evidence as to a person's ability to repay their credit, reputation speaks loudly and long. And while you should pay attention to things such as Paydex scores and references, your gut instinct should also be considered seriously. It's also hard to ignore the fact that after you have been in business for a while, word definitely gets around about people, and if there is a strong indicator of a person's willingness and ability to pay you, it is how they have done paying other people.

2. References. Before you grant business credit to anyone, make sure you get all of the usual information: name, address, phone numbers, credit references, bank information, and anything else you can think of that would be relevant to checking out a person's background.

Don't hesitate to ask questions. Get everything you think you need, whether you get paid, need to chase somebody, or even end up in a collection situation, you need to know as much as you can about who you are considering giving credit to.

3. Financial Statements. Especially for larger purchases, you might do well to ask for some proof of someone's finances.

This could best be done by a review of their financial statements and profit and loss statements. In many cases, business owners will tell you that this is confidential, but you still need to reserve your right to get a good picture of a person's financial soundness.

4. List of references. Here's another area where things can get tricky, especially when there are no good ones. People object to providing references for a wide variety of reasons. First, they might not have any good ones. Second, they might REALLY not have any good ones. And this is where things get nasty.

The first question you need to ask yourself is why? They might not just want you talking to any of them. In other cases, they might not want you speaking with people who can prove to you that they are stretched too thin, even if they could handle the extra trade credit. Another trick people play when they lack good trade references is when they will provide "references" that are unreachable or seem to have vanished. People will often also provide you with letters of recommendation, often from the most obscure people, everybody except anyone having any knowledge of their business affairs.

5. Verification of Insurance and license documentation.

Again, these are still rather slim when it comes to checking someone's background, but at least they will give you more information than you had previously.

6. Previous complaint history. This is best obtained from the BBB, FTC, etc., This is another source of information that is likely to prove someone's past. If their past has not been good, chances are good that neither will their future.

7. Company information. Just because you might be dealing with a person doesn't mean you're talkng to the person who pays the bills. If you don't know about a company, try to find out who you will be dealing with. Just because one person has a good reputation, doesn't mean everyone on a company's staff does.

One final word of advice when it comes to granting business credit: be consistent. It's okay to loosen the reins when you are doing business with someone you know, but everyone else, treat them with respect and equally.