Winning a new client is always exciting for a recruitment agency. Before placing a candidate, though, it’s important to ensure that the client is financially stable. Carrying out a credit check is one of the simplest and most effective ways to reduce financial risk and protect your agency from bad debt.
This is especially important when making contract or temporary placements. In many cases, agencies pay workers before receiving payment from the client, often using funding from a Pay-and-Bill provider or invoice finance company. If the client doesn’t pay, your agency could be left covering those costs.
So, what happens if a client fails a credit check? While it can be a cause for concern, it doesn’t always mean the opportunity is lost. Here are the steps you should consider before deciding what to do next.
Why Credit Checks Matter
A credit check provides valuable insight into a client’s financial health and ability to meet their payment obligations. It can also indicate how much credit your agency should be prepared to extend and whether any warning signs need addressing.
Many invoice finance providers and Pay-and-Bill companies also require satisfactory credit checks before agreeing to fund invoices. If a client doesn’t meet their criteria, funding may be declined, leaving your agency exposed to unnecessary financial risk.
Speak to the Client
Your first step should always be an open conversation with the client. In some cases, they’ll already be aware of their credit rating and be able to explain the situation. In others, the poor rating may come as a complete surprise.
Approaching the discussion professionally demonstrates that your agency carries out proper due diligence and manages risk responsibly. It can also provide an opportunity for the client to address any issues before they affect your working relationship.
Ask for Updated Financial Information
Credit reports are often based on filed accounts, which can be several months old. If the client’s most recent accounts showed weaker financial performance, their current position may be much stronger.
The client may have secured new investment, improved profitability or strengthened their cash flow since their last accounts were submitted. If they’re willing to provide up-to-date financial information, this can sometimes be supplied to the credit-checking provider, who may be able to reassess their credit rating.
Consider Shorter Payment Terms
If the client’s credit rating cannot be improved but you still wish to proceed, reducing the payment terms can significantly lower your exposure.
Shorter payment terms reduce the time between paying your candidate and receiving payment from your client, helping to improve cash flow and minimise risk. It may also be sensible to review notice periods within both client and candidate contracts, allowing greater flexibility should the client’s financial position deteriorate.
Explore Payment in Advance
Another option is to request payment upfront, particularly for contract or temporary workers.
This can be achieved by issuing pro forma invoices before candidates begin work each week. While this approach can be more administratively demanding, particularly where workers’ hours vary, it removes much of the financial risk associated with delayed or missed payments.
Know When to Walk Away
Although every placement represents potential revenue, not every opportunity is worth the risk.
If a client has failed a credit check and there is no practical solution to reduce your exposure, walking away may be the best business decision. Sometimes there is a reason why other agencies have declined to work with a client, and avoiding a costly bad debt today could protect your agency’s long-term financial health.
Protect Your Business Before You Place
Credit checks should be viewed as an essential part of every recruitment agency’s onboarding process, not an administrative hurdle. They provide valuable insight into a client’s financial position and allow you to make informed decisions before committing valuable time and resources.
If a client fails a credit check, MAYACHI can advise on how best to secure a new credit rating, adjust the contract terms, or whether it’s time to walk away.
We offer a free two-hour MAYACHI consultation to discuss your objectives and explore the most practical ways to grow and protect your business.