One of your responsibilities as a manufacturer or distributor, or any seller for that matter, is to conduct a business credit check on your buyer to assess their creditworthiness and help you reduce your credit risk. In other words, you need to make sure that your buyers are legitimate, financially stable businesses with the ability to pay you for the goods and services you’ve provided before you sign a contractual agreement.
In this blog, we will break down the differences between a business credit check and a business credit review and outline how you should conduct both properly.
A business credit check is a catch-all phrase that explains the process of determining the creditworthiness of a buyer looking for credit. Sellers pull a bureau credit report, check their buyer’s credit score and, most importantly, have the buyer complete and sign a credit application. Asking a client to fill out and sign a digital credit application is the first step to offering credit terms. Once the credit check has been completed, the seller will have information regarding the health of the buyer’s finances, including verifying the buyer’s bank account and checking vendor payment history -- as well as verifying the company’s corporate details.
A business credit review, also known as a credit assessment, is a periodic inquiry into a buyer’s past payment history and creditworthiness, and a deep dive into how the buyer’s creditworthiness may have changed since the initial credit check, or the last credit review.
There are five main purposes for why sellers should conduct a credit review:
Although the purpose for why sellers conduct a business credit check and a business credit review is the same (i.e., to determine the creditworthiness of the buyer), they are not quite the same thing.
Here are some additional differences between a credit check and a credit review:
To conduct a proper business credit check, you, as the seller, need to ask the buyer to fill out a credit application. Before signing a sales contract with your manufacturer or distributor, we recommend using a digital credit application so you can get a clear picture of the company’s creditworthiness and financial standing, and verify the company’s identity. This is always the first step.
A credit application also allows you to check vendor references of the buyer, verify bank accounts and get a clear financial picture of the buyer. All of this information is critical to have as part of the initial credit check process.
More importantly, you need to make sure that the information you gather is accurate. One way to gain more accuracy through your credit reviews is to switch to a digital credit application as they allow you to verify the company name and bank account information easily. Additionally, you can also avoid minor mistakes or missing key information, and have a digital audit trail with records that can stand up in court.
It’s important to understand that the creditworthiness of any company changes over time. A company can go bankrupt, fall back on its payments to other vendors, or even go into greater debt as a result of bad decisions. All of these factors impact the company’s ability to make regular payments.
So, once the initial check is complete and the buyer signs the Terms of Conditions of Sale with the seller, you still need to continue doing regular credit reviews.
But, how often should you conduct a proper credit review? As mentioned above, we recommend doing them annually, when there’s a negative change in a buyer’s payments or when a buyer asks for more credit or different terms. By doing so, you’ll be able to get the most updated information on your buyer and decide if you want to change the credit terms when the time comes, or if you want to amend the contract in any way.
Instead of sending Microsoft Word documents or PDF templates to buyers for a credit review, we recommend streamlining the process by using a digital credit application software like Nectarine Credit.
Nectarine Credit allows sellers to conduct automatic vendor reference checks to reduce delinquencies, manage all your credit applications in one dashboard to reduce the credit approval time, and verify banking details with cash flow reports securely.