The simple guide to understanding your customers’ financial health

Fatima Ayoub
Head of Marketing

Risk is a normal part of doing business, but unnecessary financial risk can be stressful, costly and detrimental to your organisation. Credit ratings are designed to help minimise the risk that small businesses are exposed to.

If you’re going to trust your customers and clients to buy now, pay later via offline trade credit, it's vital to know how conscientious they usually are when it comes to paying off their debts. If they have a history of late payments – or worse, non-payments – you could be at risk of losing out on cash. 

This is obviously bad news for your business. The longer you wait for invoices to be paid, the greater strain your cash flow will be under. As we’ve covered in a previous article, poor cash flow can lead to a myriad of issues including stifled growth, inability to pay your own business debts and outright insolvency.

What does ‘creditworthy’ mean?

Business creditworthiness refers to how likely or unlikely a business is to pay off their debts – it works in a very similar way to your personal credit score. Lenders such as banks will look at this before they decide whether to lend, how much to lend and what interest rates and repayment terms to apply, so they can minimise risk as much as possible.

In a similar way, a B2B merchant or marketplace needs to assess the creditworthiness of their customers before deciding whether to extend trade credit and provide the option to buy now, pay later. Still, when a supplier chooses to offer pay later options and finances these from their own books, they may be subjecting themselves to unnecessary risk.

A business with a low credit score is not considered creditworthy as they are more likely to struggle to pay off their debt, based on an assessment of their past transactions. Conversely, a business with a reputation for paying their invoices in full and on time will likely be a safe customer to trade with.

You will need to access credit history reports from the likes of Experian or Creditsafe, or use our Hokoscore tool, to inform your lending decisions.

Top tip: It’s handy to know your own business credit score too, because it highlights what risk – if any – is already attached to your business in the eyes of lenders and suppliers. It can take time for an SME to build up a strong credit rating. According to Experian, “businesses in the South West [of England] have the strongest average business credit scores in Britain, while London ranks as the lowest”.

How is business creditworthiness determined?

Business creditworthiness is based on an assessment of:

  • Credit repayment history – If past credit has been paid off on time and in full.
  • Defaults and late payments – If previous payments have been made late or missed completely. The more late payments, the more the credit score can be affected. 
  • Debt to income ratios – How much debt a business already has to pay off, compared to how much revenue is coming in.‍
  • General financial standing – This includes financial statements, profits, expenses, the business’ age and more.

How Hokodo can help

Running the finance department of a B2B e-commerce store or marketplace is no mean feat – and that’s before you’ve allocated time, cash and resources to conducting credit and fraud checks on all of your customers. Why not let Hokodo’s expert credit and fraud teams ease the burden?

One key feature of our B2B Buy Now, Pay Later solution is a full credit risk assessment of every business in your client base. This check – which only requires a business name and address and does not impact your customers’ credit score – takes place in the background while your customer shops. By the time they reach the checkout, your customer is presented only with the payment terms for which they’ve already been approved based on their creditworthiness.

A combination of specialist knowledge, information from Companies House and our own research and modelling means that we are able to offer payment terms even to first time buyers.

The benefit to your business of course being that your team no longer has to spend their limited time and resources on carrying out lengthy credit checks. 

Book a demo today to find out more about how Hokodo’s B2B Buy Now, Pay Later solution can ease the operational burden of carrying out credit risk assessments on your business customers.