Although it may be perceived as relatively new, customer credit checks are essential measures for businesses in order to make informed decisions regarding customers. The cluster of words in the term gives a vague insight into what the process entails already.
A customer credit check is an important evaluation process. Reading further in this article will leave you better informed about customer credit checks and why it is truly important. But of course, a better explanation and definition of customer credit checks will be a better consequent section for this article.
What Is A Customer Credit Check?
This refers to a process that entails evaluating the creditworthiness of a person or business by reviewing the person's credit score. This process is undertaken to ensure that a customer will be able to repay any debt or credit they may be seeking from the company.
The process involves a request for permission to review the person's credit report or of a business from credit reporting agencies. The credit report provided will then provide information about the customer or business's history and current credit balances.
With the information obtained, an informed decision is possible. The company decides whether to approve a loan, a credit card, or any other form of credit. A customer credit check is a constituent of the KYC process, which is of the customer onboarding process as well. There are two types of credit checks:
1. Soft CreditCheck
This is a credit inquiry that does not affect the borrower's credit score. It is used by lenders for preapproval or prequalification purposes. It can also be used by landlords to verify a borrower's creditworthiness. Soft credit checks typically involve a review of a borrower's credit report without any deep analysis of information.
2. Hard Credit Check:
A hard credit check, often referred to as a hard inquiry, is a credit inquiry that has the potential to lower a borrower's credit score. When a lender makes a credit determination, such as approving an application for a loan or credit card, it conducts a hard credit check.
Before accepting services that demand recurring payments, other organizations like landlords, utility providers, or cell phone carriers might also run hard credit checks on potential customers. A borrower's credit report contains information on hard credit checks, and having several in a short period of time can harm their credit score.
Why A Customer Credit Check Is Important For Businesses
Customer Credit Checks are not only utilized by credit card companies or loan companies, or any other financial-related institution. It can also be utilized by other types of corporate companies and businesses that sell or provide services for payment. In order to prevent cash flow issues, customers can be assessed in order to determine whether they will default in payments or not. Asides from that, customer credit checks can also inform sales strategies. Some of the importance of a customer credit check for efficacy in business include;
1. Customer Credit Checks Help Mitigate Risks:
It not only mitigates risks but identifies them; this is how risks are then mitigated because they have been initially mitigated. This means that risks are reduced. When credit checks are conducted, it reduces the risks of bad debts and non-payment. Credit checks enable a business to assess a customer's ability to pay back their debts and to pay for services as well. This way, businesses that offer credit can make informed decisions on whether to extend credit or not.
2. Customer Credit Checks Helps Businesses Make Better Decisions:
Because credit reports are undertaken, businesses are able to gain valuable insights into a potential customer's behaviour. These include payment history and outstanding debts. Access to this sort of valuable information will help businesses make informed decisions about extending credit and setting credit limits.
3. Improves Customer Relationships:
Customer credit checks will help businesses build trust with customers. In a case where credit reports come back with positive numerical, a company is able to see that the potential customer takes their financial obligations seriously. Companies can demonstrate a commitment to responsible lending practices; this will put a business in a positive light and therefore attract more customers.
4. Protects Cash Flow:
Accumulating debts can have major negative impacts on a company's cash flow. By conducting credit checks, businesses can avoid extending credit to high-risk customers and ensure that customers do not default on payment.
5. Resources Can Be Effectively Managed:
With credit checks; businesses can allocate resources more effectively. When high-risk customers are identified, they may require additional attention and monitoring. It can also help businesses avoid wasting time and resources on customers who may likely flaunt payments.
6. Targeting Creditworthy Customers:
Credit Customer credit checks enable businesses to identify customers with solid credit histories and low defaulting on payments. This means they are more likely to be financially stable and have more resources to make larger purchases or engage in long-term relationships with businesses.
Information obtained from customer credit checks can be useful to sales and marketing teams to target these beneficial potential customers and tailor their messaging and promotions to appeal to their needs and preferences.
Certain industries or governments require businesses to perform credit checks on customers before extending credit to them. Failure to comply with this regulation attracts fines and legal issues.
8. Identifying Fraud:
Customer credit checks help identify potential fraudsters or customers that may attempt to obtain credit with false information. This helps businesses avoid financial losses and maintain a solid reputation.
How Are Customer Credit Checks Done?
Customer Credit checks can be done by businesses, banks, and other financial institutions or entities to assess the creditworthiness of individuals or companies before extending credit to them or doing business with them. Customer Credit Checks involve multiple steps, which include;
a. Obtaining the customer's personal information:
Which includes the customer's full name, address, date of birth, driver's license, passport, and national id cards.
b. Checking credit history:
In Kenya, credit history is checked through the Credit Reference Bureau (CRB) system. The CRB system is a centralized database that collects and maintains credit information on individuals and businesses from various lenders, such as banks, microfinance institutions, and mobile lending platforms.
c. Reviewing financial information:
The customer's income, employment history, and other financial information may be requested to assess their ability to repay credit.
d. Analyzing credit scores:
Credit scores are generated based on the customer's credit history, and lenders typically use this information to determine the likelihood of default.
e. Making a decision:
Based on the information obtained, businesses can now make decisions that are beneficial for the company, taking into account many factors like cash flow.
Customer credit checks are a substantial part of the KYC process and also seek to protect companies from customers who will not have favourable commercial relationships with them. It will therefore help companies flourish and grow while avoiding problems with cash flow. With the Youverify automated OS KYC processes can be done much more faster and efficiently.
Book a demo session today to see how Youverify can help automate your customer credit check for a more efficient and cost-effective process.