How to do a Credit Check on a Prospective Customer

2 min read

Doing a credit check is an important first step if you are planning on extending credit to a new customer or client. Read how to do a credit check.

Why do a Credit Check?

Before you extend credit to a customer (be it an individual or a company), it's best practice to check the prospective customer's credit history. A bad credit history can be used as an indication that the person or company who is seeking credit may not repay the debt in a timely fashion, or worse, like default on the debt completely. With a credit check, you can gauge the level of risk involved in extending credit—and it can help you decide whether the benefit of extending credit is worth the risk. Remember, bad credit doesn't have to end the relationship. You can always consider an alternate payment strategy, like paying up-front, instead of extending them credit.

How to get Authorization to Perform a Credit Check

A person or a business's credit history is private. Therefore, you must have authorization from the owner of the credit history before being able to access the information legally. An efficient way to get permission and collect other pertinent information is to have the other party complete a credit application. A credit application generally includes:

Business name and DBA names
Name of owner(s)
Business structure: Sole proprietor, LLC, C-Corp, S-Corp, or Nonprofit
Contact information like your address, email, phone and fax
Taxpayer ID number or social security number
Number of years in business
Trade references
Bank references
The amount of credit requested
An authorization to access a credit report

How to Get the Credit Report

Once the applicant provides the necessary information, references, and a signed authorization for you to access the credit report, you can then contact a credit agency like Dun and Bradstreet who can provide you with the credit report. There is generally a fee involved. Alternatively, you can ask the credit applicant to provide a copy of their credit report with the completed application.

Checking credit is an important step before issuing credit, and allows you to make an informed decision about the level of risk associated with extending credit to the person or business. Don't skip this important step, or you might be more likely to need help from a debt collection agency in the future.

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This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.