How to Vet New Customers Before Extending Credit

How much do you need to know about a business before extending credit?

What are the red flags of a future debtor?

Extending credit to a new customer is a vote of confidence, but it's also a risk. One unpaid invoice can wipe out the profit on a dozen good ones. The good news is that most credit losses are preventable. The bad news is that many businesses only discover a customer's payment history after the invoice goes past due.

Vetting a new customer before you extend credit isn't about being suspicious of everyone. It's about knowing who you're doing business with, setting terms you can live with, and catching red flags early. Here's a practical checklist to help you get it right.

Start With the Basics: Verify the Business

Before you talk about terms, confirm you're actually dealing with a real, operating company.

Get their legal name and structure. Is it an LLC, corporation, partnership, or sole proprietorship? This matters for who signs the agreement and who you'd pursue if payment fails.
Confirm they're registered and in good standing. Check your state's Secretary of State or business registry for the entity's status and registered agent.
Check the people. Know who owns the business and who has authority to sign. A quick look at the company's leadership can tell you a lot about stability.

Pull a Business Credit Report

A business credit report is the closest thing to a payment track record. Services like Dun & Bradstreet, Experian Business, and Equifax Business provide scores and payment history that show how the company has handled credit in the past.

What to look for:

Payment history. Do they pay on time, late, or not at all? Patterns here are the strongest predictor of future behavior.
Credit utilization. A company that's already stretched thin may not have room to pay you.
Public records. Bankruptcies, judgments, and liens are major red flags.
Trade references. Ask for references from other suppliers or vendors and actually call them. Ask how the customer pays, not just whether they pay.

Check the Owner's Personal Credit (for Small Businesses)

For small businesses and sole proprietors, the owner's personal credit is often the real story. Many small companies have thin business credit files, so the owner's personal history is a useful window into how they manage money. If you're extending meaningful credit to a small business, a personal credit check on the principal — with their permission — can be worth the effort.

Run a Background Check and Look for Red Flags

Beyond credit, a few quick searches can surface problems a credit report won't show:

Search for lawsuits and judgments. Court records are public. A history of unpaid judgments tells you they've been through this before.
Look at their online presence. A professional website and active business presence are good signs. A company that's hard to find or has no footprint may be harder to collect from.
Watch for red flags in the relationship itself. Be wary of customers who push for unusually large credit limits, rush you to ship before paperwork is done, or resist signing a credit application. Pressure to bypass your process is a warning sign, not a sign of confidence.

Set Terms Before You Ship

Vetting is only half the job; the terms you set matter just as much.

Use a written credit application. Require every new customer to complete one before you extend credit. It collects the information you need and creates a paper trail.
Set a credit limit. Start with a limit you can afford to lose, then raise it as the customer builds a payment history with you. Don't extend your full comfort level to an unproven customer on day one.
Define your payment terms clearly. Net 30, Net 60, deposits, and late fees should be in writing before the first order ships.
Require a personal guarantee for small businesses. For a small or new company, a personal guarantee from the owner gives you recourse beyond the business itself.
Ask for a deposit on large orders. A deposit protects you and signals the customer's commitment.

Monitor After You Say Yes

Vetting isn't a one-time event. Customers change; new ownership, cash flow problems, or a downturn in their industry can turn a reliable payer into a slow one.

Recheck credit periodically. Pull updated reports on your larger or older customers at least once a year.
Watch payment patterns. A customer who starts paying at 45 days instead of 30 is telling you something. Address it early.
Review credit limits regularly. Raise them for customers who earn it, and tighten them for those who don't.

Get Help with Commercial Debt Collection

No matter how carefully you vet, some accounts will still go unpaid. That's a normal cost of doing business on credit. When it happens, the key is to act quickly and professionally.

We handle commercial debt collection from the first professional demand letter through litigation if necessary, so you can protect the relationship while still getting paid. You can place a claim securely through our online portal, upload your documents, and track progress in real time.

Get the money you deserve. Call us at 248-370-8160 or fill out a click here to fill out a contact form.