Is a prospective customer credit-worthy? Its banking history can provide a lot of clues

Extending credit to customers is riskier than ever. Whether it’s an existing customer looking for more favorable terms or a newer client a company doesn’t have a track record with, it’s best to obtain as much info about the customer’s payment habits as possible.

One beneficial step companies can (but often don’t) take is to check a customer’s banking history first. Banks provide the “additional info” that can’t be found elsewhere during a credit investigation, according to a recent white paper, “Unlocking Financial Trust: The Role of Bank References in Establishing Creditworthiness” from the National Association of Credit Management (NACM).

NACM polled credit & collections professionals on how often they check customers’ banking histories when conducting credit checks:

• 35% said not often
• 25% do so half of the time
• 23% said almost always, and
• 17% never request bank info.

Exactly half of credit pros polled by NACM say their companies lose thousands of dollars per year, as high as $100K in some cases, because they can’t obtain sufficient customer credit data. One credit pro said, “In the last few years, we’ve had about $80,000 worth of credit loss due to fraud and insufficient customer information. We’ve seen an increase in identity theft unfortunately not recognized until after we shipped the product, which resulted in the loss.”

Bankruptcy, fraud keep credit pros awake at night

Banking data can quickly highlight a customer’s or prospect’s financial problems, particularly one that may be teetering on bankruptcy. Bankruptcy rates are currently on par with 2009 levels and some businesses and individuals are declaring bankruptcy for a second time, leaving many of their creditors high and dry.

NACM asked credit pros “what’s the biggest cause of credit loss in recent years?” The responses:

• bankruptcy (34%)
• unresolved invoice issues and discrepancies (31%)
• fraud (19%), and
• insufficient credit investigations (16%).

Bank references can help reduce the risk of all four of those factors due to the wealth of data they provide – current balance as a relative range and figure category, payment history, collateral, days overdrawn, number of returns in the past 12 months, average balance of outstanding loans, and more.

Getting trade references in lieu of banking history has its disadvantages. The info may be biased since “customers are unlikely to send their worst trade references.” There’s also no universal standard for trade references.

The sweet spot: Get both credit histories and trade references, despite the extra work and time investment, to assess both creditworthiness and financial stability.