What Is Credit Vetting
Building Credit | Credit

What Is Credit Vetting?

Credit vetting is a finance-based terminology, referring to the examination process in which a person or an organization is evaluated to determine their creditworthiness. The process can also be conducted to conclude whether the credit company should extend their credit to the said individual, renewing the loan terms upon request.

If you don’t have a lot of knowledge about how credit vetting works, this might seem like a simple concept in theory. However, in practicality, there’s a whole process running in the background that takes at least two to three working days before you ultimately get an approval or a decline.

If you’re looking to understand what credit vetting is in detail and learn why it is essential to use a credit checking company to evaluate your customers beforehand, you can use this guidepost as a reference point!

Credit vetting vs. Credit checking – learn the difference

Before we begin discussing the process of credit vetting in detail, it’s essential to have one misinterpretation out of the way. Due to the lack of expertise in the field, most people assume that credit vetting and credit checking have similar meanings. However, it’s crucial to realize that this is, in fact, not the case.

When it comes to credit vetting, the process includes everything from scratch to the end. This means customers get to negotiate the best credit, develop a repayment plan, collect their cash, and creditors even insure themselves lastly. On the other hand, credit checking is only a single stage of credit vetting in which the creditor can analyze their customers based on their creditworthiness.

In simple terms, credit vetting is a whole process that takes multiple days in which both the customers and the lender can ensure they are suitable for each other. On the contrary, credit checking is only limited to the stage where you, as the lender, can gauge your client’s financial track record to realize whether they’re worth doing business with.

4 stages of credit vetting for businesses

The following four points delineate how credit vetting usually works between a creditor and the debtor. You can either think of it as the credit vetting process or a mere checklist, whatever helps you understand the concept better.

black asus laptop computer on white surface

Stage 1 – negotiating the best deal

Ideally, you would want your clients to repay you in thirty days. However, since that’s not always as easy as it sounds, you need to consider offering them incentives for immediate payments. For example, you can allow them a three to five percent discount on such repayment plans while keeping in mind not to cut into your profits too profoundly. Or, you can think about charging interest if they ask for extended payment terms.

In short, the first step in credit vetting is to ensure you have outlined a strategy to get your clients to pay as soon as possible after delivery.

Stage 2 – credit checking

Moving on, you need to perform a credit check on your customers to ensure you’ll get paid for your service before you begin working with them.

When clients request payment terms, you can ask them to fill out an agreement form requiring their signed consent. This document should clearly indicate that you will be performing a credit check on their business.

A credit check will allow you to analyze your client’s track record, establishing how they handled their due diligence with other companies. Whether they’ve honored their debt or not in the past can give you a good enough idea about what you can expect from them when it’s time for them to pay you back.

For this, you’ll need to get in touch with a reliable credit service company that can authentically help you check out your potential customers’ businesses.

Stage 3 – cash collection

A fool-proof cash collection process is also crucial, especially for a growing business’ success, since it minimizes financial risks with non-payers or late-payers.

To make sure you have a strict collection system, you must always invoice on time. When you make it a priority to send your invoice to your client’s accounts department at the right time, you remain higher on their list when they begin making repayments to all lenders.

Moreover, you can also use a quality accounting software system for this purpose. This will ensure you’re always aware of all late payment cases before they could begin impacting your business’ bottom line.

Once that’s out of the way, you can then strategize your late payment plan. When you keep alerting your clients of late repayment or implement a penalty system, they avoid repeating the same mistake. Or, you can also hand it over to collection agencies, in this case, to get paid quicker.

Stage 4 – insurance

Lastly, you’re allowed to take out debtor insurance policies to protect your business against non-payers. For this, you can work with your broker to analyze what coverage might suit your business needs better.

3 reasons a credit check comes out negative

There is usually one of the following three reasons when a credit check company doesn’t approve the credit vetting status:

  1. There’s little to no credit history or a negligible credit score to base the result upon.
  2. The application may also get declined when a client has a poor credit history.
  3. Lastly, there could be outstanding money a client might already owe to your company that you weren’t aware of.

Now that you understand how a credit vetting process takes place, let’s review the top reasons to invest in the best credit checking companies for your business!

Benefits of using a credit checking company for your business

Asking a credit checking company to analyze your client’s track record can be exceptionally beneficial to your business in four ways:

1- Introduces positive cash flow

Business owners understand how imperative it is to maintain a positive cash flow since that keeps them tending to their day-to-day requirements. When that’s the case, performing a credit check on their potential customers can prove beneficial to determine whether they’re credible enough to return the money on time.

2- Helps determine suitable interest rates

When you’re risking your own business to extend credit to another company, you want to ensure you’re rewarded handsomely for that. A credit check can help you determine a reasonable interest rate, one that doesn’t put you under too much risk, considering the debtor’s financial stability.

3- Avoidance of bad debt

A business can also prevent itself from encountering its worst nightmare – a bad debt – by running a credit check. When a client has proved their creditworthiness, you know they will likely make the payments on time.

4- Estimate your client’s financial stability

Lastly, when you’re looking to get into a long-term partnership with a business, you must be sure that it won’t go under midway, leaving you hanging. A credit check can help you figure out whether the company you’re thinking about working with is financially stable enough and worth the risk.

Our final thoughts

All in all, credit vetting is a crucial process conducted by creditors to evaluate their customer’s creditworthiness. By using an authentic credit check company to get the deed done, you can protect your business from the non-payers who can negatively affect your business’s bottom line. Moreover, it can also be a viable option to perform a credit vet on an organization when you’re thinking of buying into a stable business for your future stability.