A credit check is what?
A credit check is getting a report on a company's financial background.
Credit reports, also known as credit files, typically include a six-year history of all loans, credit card purchases, mortgages and other borrowings. Lenders often utilise them to determine how financially stable or healthy you or your Clients are. This aids in their decision-making regarding a credit application.
There are two situations in which a company could do a credit check:
- To obtain a credit limit (to facilitate a contract)
- To screen potential Clients – whom to work with and who not to work with
What information does a recruiter seek out in a credit report?
For indications of financial malfeasance, agencies search for evidence of County Court Judgments (CCJs), bankruptcy, or any other relevant financial circumstances. They will then apply this knowledge to choose a potential client—informedly.
The validity of credit checks is a concern.
Although credit scores cannot be viewed, recruitment agencies can request a credit report with the owner's permission.
Businesses are welcome to look up information already in the public domain, such as information that has been reported to Companies House, while doing a background check on a business.
The Financial Conduct Authority (FCA) standards should be followed for all checks.
Conducting credit checks on Clients
Not only do agencies require protection, thus it could be a good idea for recruiting businesses to conduct some legal due diligence on the companies who contact them.
Tech giant Sage, in partnership with Smart Data Foundry, assesses the level of late payments on cash flow for small and medium-sized firms. It revealed that SMEs were owed an average amount of £22,000 and that 40% are consistently paid late.
Therefore, can the recruitment industry afford to take on clients with a bad credit history?
How to verify a Client's credit
Joining one of the UK's major credit reference bureaus is the greatest way to check out a potential client's financial history.
Paying for one of these services will provide recruiters access to details like a client's credit limit and risk tolerance.
A credit limit is a guide to the amount of money a client can afford to pay out at any time. Therefore, it is advised not to have any more than the limit guide outstanding with that Client at any time.
Although it can't ensure that a corporation will pay up, information obtained from lenders and public records will demonstrate if they can do so.
Of course, you may always ask the Client for a bank reference or visit them in person if unsure.
How to handle a Client with a low credit score
You don't have to stop working with clients because they have a spotty financial history. Of course, the recruitment business bears the risk of any choice to work with such a client, but there are steps you can take to protect your company.
Get Clients to pay in advance
Demanding money in advance may seem apparent, but it may be the wisest course of action when dealing with a client who has a poor credit history. While not all companies will find paying for a service in advance to be all that appealing, the threat of having the service discontinued may leave them with few other options.
Alternatively, you may ask for a portion of the cost. Even if this won't ensure complete payment, ensuring you receive a portion of the expense will at least provide your agency with some security.
Another way of enhancing your cash flow is to request shorter payment terms, such as 7 or 14 days rather than 30/60/90 days.
Make use of a factoring service
Recruiters may seek a factoring/ finance company to pursue the debt if cash flow is a concern.
You can sell invoices to a third party for a discounted price through the financial process known as factoring. The third party will then pursue the Client to collect the invoice amount.
This guarantees that the agency gets paid and that the financier will chase any outstanding invoices.
Should you accept a Client with a bad credit history?
If a client has a bad credit history, you might occasionally have to bite the bullet.
Taking the risk rather than going through the expense and hassle of conducting a background check can make more sense, depending on the position and the possible financial reward.
What should you take from this?
Credit checks can aid agencies in making informed decisions about which Clients to work with.
The be-all and end-all of the decision-making process should not be the financial facts. Just because a client is deemed "risky" doesn't automatically mean you should reject them.
Each situation should be handled individually.
Background checks are therefore vital whether you're a new consultant honing your talents or an experienced agency.
Simplicity is here to help.
With the support from Simplicity's solutions which provides recruiters with financial and back-office support and FREE recruitment technology. Recruiters can not only get started but prosper and grow. Find out how we can support you to get started today. Speak to one of our specialists at 01594 888518 or email sales@simplicityinbusiness.com
