What is a customer credit check?

Definition

A customer credit check is the review of whether a buyer can and will pay before you let them charge. It is a decision process, not a journal, and it does not change accounts receivable by itself.

You are asking a simple question. If we ship now and bill later, how likely is this customer to pay on time?

Where it shows up

Balance Sheet: Related to nothing until later sales create a receivable.

P&L: Related to nothing extra unless a later write-off is avoided or taken.

Cash flow: Related to nothing extra.

See also: Credit Application · Credit Limit · Payment Terms

You will not find this review on the Balance Sheet. Later sales on account create a receivable in current assets, and the review is only the work that came first.

The Income Statement does not change when you look someone up. Revenue waits until you deliver and bill, and a later write-off is a separate event if the review was wrong.

Cash does not move when you complete the review. Operating cash later depends on the invoices you allowed, and on whether those invoices collect.

The notes from the review usually sit in the customer file. They explain why you said yes, no, or yes with a smaller ceiling.

How it works

The review starts after a customer asks to buy on account. You read the form they submitted, then you test those claims against facts you can check.

Typical facts include how long the business has been open, who owns it, trade references, and how they have paid you so far. Public records and a bureau report can sit next to those facts.

You are not posting a journal. You are deciding whether to offer terms, how large an unpaid pile to allow, and how soon each invoice will be due.

A clean history can support a higher ceiling or a longer due date. A thin or messy history can mean cash only, or a small ceiling with a short due date.

The review is not finished when you assign the first ceiling. Many shops look again before they raise that ceiling, or when payments start slipping.

A later look at payment history is still this review. You are asking whether the customer still deserves the terms you already granted.

The review does not collect cash. Follow-up on unpaid invoices is a different step after a bill is already past due.

A careful review can lower the chance of a later write-off. It cannot erase the risk, because a customer who looks fine today can still fail to pay next quarter.

Example

A florist already sells bread to a cafe on a small ceiling. The cafe asks to raise that ceiling so it can charge two weeks of orders at once.

The florist pulls the cafe's payment history for the last six months. Most invoices were paid inside the due date, and one invoice sat ten days late.

The florist also calls one trade reference. That shop says the cafe pays, but often near the end of the window.

The florist does not post a journal for the review. After the review, the florist raises the ceiling a little and keeps the same due date.

If the history had shown many late invoices, the florist would have left the ceiling alone. The books would still have changed only when the next allowed invoice went out.

Common mix-ups

A customer credit check is not a credit application. The application is the form the customer fills out, and the check is the work you do with that form and with outside facts.

A customer credit check is not a credit limit. The check is the review, and the limit is the dollar ceiling you may set after the review.

A customer credit check is not payment terms. The check helps you decide whether to offer terms, and the terms are the due-date rule you actually grant.

A customer credit check is not a write-off. The write-off removes a balance you no longer expect to collect, and the check tries to decide, up front, whether that balance should be allowed at all.

Related terms

• Credit Application: The form a customer completes to be approved for terms.
• Credit Limit: The maximum balance a customer is allowed to carry on account.
• Payment Terms: The agreed deadline and conditions for paying an invoice.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Bad Debt Expense: The expense recorded when receivables are judged uncollectible.
• Collections: The process of following up on unpaid customer invoices.
• Sales Order: The internal record of a customer's confirmed order.
• Internal Controls: The procedures that keep the books accurate and assets protected.